Peak SBUX?
Could the new CEO's first quarter out of the box get any better?
SBUX 2Q23 Non-GAAP EPS of $0.74 beats by $0.09, and Revenue of $8.7B (+14.5% Y/Y) beats by $270M. 2Q23 SSS Up 11% Globally; Up 12% in North America; Up 7% internationally; 2Q23 Active U.S. rewards membership reaches 30.8 Million, Up 15% Over the Prior Year.
Yesterday the prepared comments from the SBUX conference were 45 minutes, during which Laxman Narasimhan, the company's new CEO, and other executives focused on new initiatives, such as streamlining store operations and making new investments to boost long-term development. They said several times that these investments are already having an impact; I have a hard time believing that these investments are already having an impact since they were only announced last September. According to CEO Narasimhan, the company reported strong performance in U.K. and Japan with double-digit comparable sales growth matching the performance in North America (North America +12% vs. FS +8.5%, transactions +6% and Ticket +5%.) Even while China's comparable sales increased by 3% vs. FS (3.0%), transactions by +4%, and Ticket (1%) (and +30% in March), he added that the path of China's recovery is likely to be uneven. China recovery has not even begun given where sales are versus 2019 (YUMC echoed the same' sentiment). The company highlighted that barista turnover, a source of concern, improved in 2Q23. On the product side, it was highlighted that the drink Oleato's introduction in three U.S. cities and Italy was a great success but did not define what that means and was expected to help drive comparable sales growth. They said its is currently available in 650 stores across three markets, Italy, Japan, and the US but stopped short of announcing further plans except to say "we look forward to bringing this exciting new offering to more stores and more markets around the world this year."
After hours the stock started to sell off when the CFO reiterated its previous full-year outlook regarding guidance after handily beating the quarter and the CEO spending 30 minutes telling everyone how great things are. They threw caution to the wind, saying there may be imminent changes in consumer behavior. The issue became more complicated, saying 2H23 is back-end loaded. "We also expect EPS to step up in the second half of the fiscal year, improving sequentially in Q3 and Q4. We expect year-over-year EPS growth in Q3 to be meaningfully lower than our fiscal guidance range of 15% to 20%, with Q4 year-over-year EPS growth slightly above the high end of our guidance range." Yet SBUX anticipates that the rate of increase of worldwide comparable sales will be towards the top end of the +7% to +9% range, and that of U.S. comparable sales will be between +7% and +9%.
This has been a terrible short for me but I don't believe that this company can sustain 7-9% SSS growth over the long term. When will the new CEO need to lower LT guidance?
Thoughts on the remaking Of BK
The brand’s struggles with franchisee profitability have prompted Burger King to change and cleanse the system. Every major QSR chain has done this over time, why did it take BK this long? The new executive chairman is have a big impact!
As expected RBI reported strong quarter with global system-wide sales for the 1Q23 increased 14.7% YoY; adjusted EBITDA growth of 15.6% and adjusted EPS growth of 22.1%. The real focus of the quarter was what is going on at BK.
A few months ago, RBI publicly revealed franchisee profitability annually, a significant move to reshape the system. The biggest benefit will accrue to RBI profitability when franchisees run more profitable restaurants. This is a significant culture shift at RBI to focus on profitability and prioritize franchisee success, including revising the annual incentive compensation for all staff members to give this even more weight. Patrick Doyle's primary goal is to improve system profitability and support the system's expansion. As with any system going thru significant changes, there will always be a minority of people who aren't devoted, enthusiastic operators. RBI will now work with them to exit the system and pursue alternative endeavors. He was blunt; saying there is no tolerance for franchisees who are unable or unwilling to make the necessary effort to run stores that consistently outperform the system average. They want franchisees that are "all-in" in this situation, whether they operate one restaurant or hundreds; they want partners who have an ownership and operator mentality; partners who set the culture, frequent their restaurants, get to know their team members and customers, and are hands-on operators.
"As a franchisor, our franchisees are our clients. We promote a business plan to them. Then we put in a lot of effort to raise the average profitability, and the franchisees put in a lot of effort to consistently outperform the norm."
"Only A and B operators will be allowed to build or acquire existing restaurants with an emphasis on concentrating portfolios to be fewer than 50 units, contiguous geographically, and with local ownership”
1Q23 was strong, but Its too early to call that Burger King US is showing signs of improvement (lest see how 2Q23 and the balance of the year turn out. The cleansing of the system where only good operators will be able to expand and weak operators could be pushed out will take a few years to complete and more closures coming. CEO Josh Kobza said that while the brand normally closes “a couple hundred” units each year, 2023 could see the chain reach 300 to 400 gross store closures in the U.S. Most of the units that will close, are low-volume units, which means the closures will likely impact unit count more than overall sales. This number will likely grow. This change, accompanies a new emphasis on regional concentration.
Burger King is clearly on a better path, but its important not to loose sight that MCD is a strong competitor. Why did this take so long?
PLAY Traffic decelerating
I'm highlighting today the significant slowdown in traffic at PLAY. In the first three weeks of April, Dave & Buster's traffic has gone from -7%, -11%, and -20%. Dave and Buster is the most economically sensitive restaurant we follow, and it's showing up in the numbers.
