Starbucks Gears Up for 4Q23 Earnings Announcement with Optimistic Estimates
Starbucks will report its 4Q23 results on November 2, before the market opens, and the anticipation in the financial markets seems realistic. The consensus is centered around a constructive growth narrative, with comparable store sales up by 6.8% vs. 10% in 3Q22 (7.0% in 4Q22), bolstered evenly by North American and international markets. The revenue outlook of $9.26 billion, up 10%, aligns closely with the guidance, while the EPS estimate of $0.97 sits comfortably at the higher end of the guidance spectrum. The detailed breakdown showcases a robust performance across different segments and geographies, hinting at a well-rounded growth trajectory as Starbucks steers through the quarter. The estimated operating margin of 17.2%, up from 15.1% in 4Q22, also demonstrates an optimistic outlook and an indication that the business is running efficiently despite the changing market conditions.
YUMC's performance is compared to Starbucks China's in terms of global performance. The estimates for tonight's YUMC numbers show a possible 2% in same-store sales, which is a big slowdown from the strong 15% seen in June 2023 and slower than the 5% seen in September 2022. Interestingly, MCD's recent mention on the 3Q23 earnings call of China seemed reserved, hinting at "slowing economic trends and a record-low consumer sentiment." Given this backdrop, tempering expectations of any significant positive surprises emerging from SBUX China this quarter seems reasonable.
If there is any drama in the quarter, it will come from the Reinvention update at 4:00 p.m.
Key Points:
- Comparable Store Sales Growth: North American and international markets are expected to grow comps by 6.8% and 6.7%, respectively.
- Revenue Estimates: Total revenue is estimated to be around $9.29 billion, which aligns with the guidance of a 10-12% increase but is at the lower end of the $9.26–9.42 billion range.
- Segment Revenue Breakdown: Company-operated stores are estimated to contribute $7.64 billion, licensed stores $1.14 billion, and other segments approximately $506.3 million. Geographically, North America is projected to generate $6.79 billion, international markets $2.02 billion, and channel development to rake in $485.4 million.
- Operating Margin and EPS: The operating margin is estimated at 17.2%, reflecting operational efficiency. The EPS estimate of $0.97 is at the higher end of the guidance range of a 15-20% increase, translating to an EPS range of $0.93-0.97.
Sip the Buzz: How Energy Drinks are Stirring Up the Restaurant Scene
The energy drink trend in the restaurant industry is not only about satisfying caffeine cravings but also about creating an engaging and personalized consumer experience. The potential for market expansion, coupled with the innovative product offerings, is setting a new trajectory for the restaurant industry to explore and capitalize on. The emerging trend is terrible news for BROS, as it was founded by pouring Red Bull into a cup.
The infusion of energy drinks into the restaurant sector is evolving into a notable trend, stretching beyond coffee chains into quick-service realms. Leading brands such as Dutch Bros., Taco Bell, McDonald's, and Sonic Drive-In are diversifying their beverage menus to include energy drinks, driven by growing consumer demand, especially among the young adult cohort. The allure of customization and visually appealing beverage presentations, which enrich menu diversity, attract new demographics, and improve customer engagement, are further driving this trend. Allied Market Research projects that the market will be worth $104.39 billion in 2023 with a CAGR of 7.50% during 2023–2028, presenting a lucrative opportunity for restaurants to capitalize on. Starbucks has delved into the energy drink market with its line called Starbucks™ Baya Energy. They offer flavors like Baya Energy Mango Guava and Baya Energy Raspberry Lime, adding a unique touch to their cold drink menu. Additionally, Starbucks had previously infused its Doubleshot espresso line with guarana and ginseng, stimulants that are common in many energy drinks. However, the Baya Energy line is their more direct venture into the energy drink domain. It seems that Starbucks is embracing the energy drink trend by offering these new beverages, providing a different kind of energy boost alongside their traditional coffee and espresso offerings.
- Energy Drink Trend:
- Energy drinks, once primarily found in full-service restaurants, are making a noteworthy entry into quick-service and fast-casual spaces.
- The market for energy drinks is on a steep rise, estimated to reach $114.70 billion by 2030, indicating significant potential for restaurants to capitalize on.
- Key Players:
- Dutch Bros., known for its Blue Rebel line, saw a 27.3% sales hike in 2022, with energy drinks accounting for 24% of total sales.
- Taco Bell is testing Baja Blast-flavored energy drinks, bringing a new tang to its beverage menu.
- McDonald's, Sonic Drive-In, and Panera Bread have also embraced the trend, partnering with brands like Monster and Red Bull for exclusive beverage offerings.
- Starbucks is in the game too.
- Product Innovations:
- In 2022, Biggby Coffee introduced its line of energy drinks with a distinctive product that allowed customization and used a plant-based caffeine additive called Zip.
- Sonic Drive-In's collaboration with Red Bull resulted in flavored Red Bull rechargers, adding a zing to their beverage platform.
- Customization and visually appealing drinks are significant draws, as seen with Biggby's colorful and customizable energy drink lineup.
- Demographic Appeal:
- The trend resonates well with young adults aged 18 to 35, 19.4% of whom are regular energy drink consumers.
- The appeal broadens the appeal to adolescents and middle-aged adults, expanding the demographic reach.
- Distribution Expansion:
- After teaming up with PepsiCo for distribution, Celsius Energy Drinks recently debuted in select Dunkin' and Jersey Mike's outlets, hinting at the potential for energy drinks to permeate various restaurant formats.
- The move towards offering canned energy drinks in restaurants is cited as a fresh way to increase consumer engagement and brand discovery.
McDonald's sustained momentum amidst a challenging macroeconomic landscape
Summary Thoughts from 3Q23
Sales have shown a moderating trend; however, the company has outperformed its counterparts in the Quick Service Restaurant (QSR) sector. The notion of joint employment poses challenges, but there's a silver lining with prospective growth being eyed in the Californian market (MCD will benefit from a significant price increase to cover labor costs). The plight of low-income consumers is palpable, as MCD traffic turned negative in the quarter. On a positive note, labor-related issues are showing signs of easing. The commendable initiative the company took to remodel its restaurants to improve the customer experience and operational efficiency highlights the importance of value in the current market conditions (a slight dig at BK). While top-line growth has moderated, it remains robust across segments, outpacing competitors due to successfully implementing the "Accelerating the Arches" strategy. Central to this is their innovative marketing and operational strategies, which have been well-received globally, contributing to enhanced customer engagement and operational efficiency. The narrative suggests a bullish stance due to McDonald's strategic emphasis on value, localized market strategies, and digital engagement. These strategies, coupled with operational efficiencies, allow McDonald's to navigate economic headwinds favorably. Still, some of that is now being questioned, given its aggressive pricing over the last two years.
Key Financial Highlights:
- Same-Store Sales: Continued growth is observed, although at a moderate pace compared to historical norms. Introducing new menu items and operational strategies like "One McDonald's Way" are driving operational improvements and customer engagement. McDonald's massive global campaign launched in August is touted as a milestone, indicating the company's emphasis on innovative marketing to stay relevant. The success of the "Best Burger" initiative in Australia, now scaled to over 70 markets, underscores the brand's focus on maintaining high-quality offerings. The efforts in Germany, Canada, and the US to provide value bundles and affordable options underscore a strategic pricing approach to drive traffic and maintain a favorable mix of offerings.
- Price, Traffic, and Mix: The focal point of the discussed part of the earnings call is McDonald's continuous emphasis on value amidst a challenging economic landscape. The executives articulate how maintaining affordability, even amidst inflation, forms the cornerstone of their customer-centric approach. They also highlight strategic pricing adjustments, market-specific value propositions, and robust digital engagement as part of their broader strategy to sustain market share and customer traffic. The discussion underscores a careful balance between price increments, value offerings, and maintaining a competitive edge in various market conditions. For the full year, the average pricing level in the US is expected to be just over 10%, with the rate of increase starting to decrease in Q3 as inflation tapers.
- Margin Trends: The operational improvements and menu discipline may hint at favorable margin trends.
- Market Expansion: McDonald's plans to expand its footprint, especially in markets like Australia, by opening new restaurants and enhancing existing ones with features like delivery rooms and integrated McCafé beverage sales.
Emerging Themes or Concerns:
- Consumer Spending: MCD acknowledges consumers are becoming more discriminating about spending due to inflation, elevated fuel costs, and other economic pressures. The discussion delves into pricing dynamics, particularly in the US market, and outlines McDonald's approach amid inflationary pressures. McDonald's pricing strategy remains disciplined, leveraging data analytics and third-party advisories to make informed pricing decisions. Notably, even with elevated pricing due to inflation, customer resistance has been minimal, indicating a successful execution of their pricing strategy.
- Innovative Offerings: The launch of the McSmart menu in Germany, responding to consumer demands for smaller, more affordable meals, illustrates McDonald's agility in adapting to market needs.
- Digital Sales Growth: Digital sales in the top six markets accounted for more than 40% of system-wide sales, or nearly $9 billion for the quarter, with over 57 million 90-day active members across these markets, indicating a solid digital growth trajectory.
Significant Executive Thoughts:
- The success of the "Remix Your Deal" promotion in Germany and the D123 everyday value menu in the US highlights McDonald's proactive approach towards evolving customer needs amidst economic pressures.
- The relaunch of small price-pointed bundles in China targeting Gen Z consumers and the record-breaking digital sales in Australia through the MONOPOLY campaign reflect the brand's emphasis on digital engagement and localized marketing strategies.
