Nothing but Net
FY23 was always going to stand out in the plan outlined last November. This is not merely a stroke of fortune but the result of overcoming the trials of FY22. Increased investments, the full force of inflationary pressures, and the pervasive effects of COVID-related disruptions defined the fiscal year 2022. As SBUX lapped this challenging period, the fiscal year 2023 showed a marked improvement in various metrics, signaling a robust rebound and a return to a growth trajectory. An element we were cautious of and wrong. We did not believe November's revised long-term forecast painted an optimistic picture, with global comp growth anticipated to reach an impressive range of 7% to 9%, and we are still weary of that possibility. In FY 2023, North American SSS came in at 9%, International at 5%, and Total at 8%. Fiscal year 2023 was a banner year, with Global at the midpoint of the range. As we look toward FY2024, we anticipate a normalization of growth, aligning with the lower end of the projected range in fiscal years 2024 and 2025. Is this a normalization, deceleration, or stabilization, or did they pull forward growth in 2023 from 2024?
SBUX outlined its financial guidance for FY24, projecting robust growth that surpasses consensus estimates. The company anticipates global comparable store sales growth of 5–7%, with a particular emphasis on the U.S. and China markets. Although revenue growth is expected at the lower end of the 10-12% range, translating to an estimated $39.6-40.3 billion, Notably, Starbucks forecasts GAAP and non-GAAP EPS growth of 15-20%, indicating a non-GAAP EPS of $4.07–4.25, which exceeds the FactSet consensus of $4.06. The company also plans an aggressive global store expansion, with approximately 75% of the growth stemming from markets outside the U.S.
Detailed Bullet Points:
- Comparable Store Sales Growth:
- Global comparable store sales (comps) growth is projected at 5-7%.
- The U.S. market is expected to match global growth with a 5-7% increase.
- The China market is forecast to grow at a slightly lower rate of 4-6% for Q2-Q4, with a higher comp in Q1 due to the lapping of the previous year's mobility restrictions.
- Revenue Growth:
- Consolidated revenue growth is anticipated at the lower end of the 10-12% range.
- This implies a revenue forecast of $39.6-40.3 billion, slightly above the FactSet consensus of $39.7 billion at the midpoint.
- Earnings Per Share (EPS) Growth:
- Both GAAP and non-GAAP EPS growth are expected to be in the range of 15-20%.
- This translates to a non-GAAP EPS of $4.07–4.25, surpassing the FactSet consensus of $4.06.
- Store Expansion:
- Global new store growth is targeted at approximately 7%.
- Roughly 75% of this growth is planned for markets outside the U.S., emphasizing the company's global expansion strategy.
The company's reinvention plan was pivotal in driving momentum, leading to improved customer and partner experiences, efficiency gains, and margin expansion. Starbucks reported record earnings and a significant increase in global comparable store sales, supported by ticket and transaction growth. The company's focus on five key areas, including elevating the brand, scaling digital initiatives, global expansion, unlocking efficiencies, and reinvigorating partner culture, has set a strong foundation for sustainable growth?
Emerging Themes and Concerns:
- The company is navigating an environment of unprecedented volatility.
- There is a focus on coffee-forward innovations and food offerings, especially in China.
- Starbucks invests significantly in its partners and stores, with over 20% of profits reinvested.
- The company is adapting to evolving customer demands with more beverages, food, and customization options.
- Starbucks is expanding its global footprint, particularly in China, with a goal of 9,000 stores by 2025.
Significant executive statements:
- "Our reinvention is moving ahead of schedule, fueling revenue growth, efficiency, and margin expansion." (Pulling forward growth?)
- "We feel very good about the business momentum for next year, the continued strength of the brand, and the opportunity for growth in the years ahead."
Triple Shot Reinvention with Two Pumps
This was a painful event to listen to, too, sorry!
Summary: SBUX has announced a comprehensive long-term growth strategy, "Triple Shot Reinvention with Two Pumps," aimed at enhancing the brand, scaling digital initiatives, expanding globally, improving operational efficiencies, and revitalizing its employee culture. CEO Laxman Narasimhan expressed confidence in the company's revenue growth and earnings potential during an investor presentation in New York City. The strategy builds upon the momentum gained in the past year and outlines a roadmap for sustainable growth and returns for partners, customers, and shareholders.
Detailed Bullet Points:
- Long-Term Growth Strategy: Named "Triple Shot Reinvention with Two Pumps," the strategy focuses on brand elevation, digital scaling, global expansion, operational efficiencies, and partner culture revitalization. It is a continuation of the company's reinvention journey initiated by founder Howard Schultz in September 2022.
- Brand Elevation: Plans to increase the U.S. store count to over 16,300 by FY24, with a long-term goal of reaching 20,000 stores. Emphasis on purpose-defined stores and accelerated renovations to meet evolving customer needs—a commitment to product innovation, focusing on coffee, customization, and personalized marketing.
- Digital Expansion: Aims to double global Starbucks Rewards membership by adding another 75 million members within five years. Introducing "Rewards Together" partnerships with a financial institution and a hospitality partner within the next six months. Resetting tech architecture and leveraging Deep Brew platform capabilities for enhanced personalization and customization
- Technology Collaborations: Partnership with Microsoft to integrate generative AI for product development Collaboration with Apple in the Green Apron Innovation store to refine technology for global partners Experimentation with Amazon One and Just Walk Out technology for an improved in-store customer experience.
- Global Expansion: Target to expand the global store footprint to 55,000 by 2030, averaging 8 new stores a day. Focus on omni-channel strategies in 86 markets where Starbucks Coffee is sold. Continued growth in China through innovation, expansion of Starbucks Rewards, and digitalization of supply chain and operations.
- Operational Efficiencies: Implementation of a $3 billion efficiency program, with $2 billion allocated to reducing the cost of goods sold. Reinvestment in the business and delivery of returns to shareholders through margin expansion and earnings growth.
- Partner (Employee) Culture: Commitment to investing in the partner experience globally. Plans to double hourly income in the US by the end of FY25 through increased hours and higher wages. Upcoming announcement of a new bundle of partner experience enhancements in the US.
Is SHAK management feeling the heat?
Shake Shack reported a 21% increase in total revenue, reaching $276 million. Same-shack sales grew by 2.3%, with average weekly sales hitting $74,000 and trailing 12-month Average Unit Volume (AUV) at $3.9 million. System-wide sales saw a 24% year-over-year increase to $439 million. The quarter started strong but saw a moderation towards the end, with a reacceleration in October due to enhanced marketing initiatives (4Q23 has easy comparisons). Profitability improved significantly, with Shack margins over 20% and a 400 basis point expansion year-over-year. Adjusted EBITDA soared by over 80% year-over-year to $36 million, with EBIT margins improving from -2.1% to 2.0%. The company is on track to open approximately 80 shacks this year, with a robust pipeline for future growth. Despite global macro- and geopolitical headwinds, Shake Shack's growth mentality remains unabated. We heightened our focus to look for changes in thinking, given the activist involvement in the name. Here are some of our takeaways.
Notable changes in thinking: Operations and Investments
The company is focusing on "improving kitchen design and operations." They aim to make food preparation faster and more consistent with a restaurant with "variable busy periods." They are working on better staffing models and scheduling to improve efficiency. The goal is to reduce variability and ensure a consistent guest experience. On this subject, the CEO seems out of touch, making one of the all-time most ridiculous statements: "We need to simplify operations so inexperienced managers can succeed." What? An alternative approach would be to slow store expansion so that they do not need to use inexperienced managers. Also, why do you think to-go sales are declining? Is it because the food is not packaged correctly since they "streamlined our packaging, condiments, and utensil standards for to-go orders" in 1Q 2023 to save costs? Below is a recent picture of how a chicken sandwich is packaged (or not packaged) at the SHAK drive-through.
The commentary on drive-throughs suggests they are rethinking the opportunity.
Location is critical to the performance of a drive-thru; areas with high traffic and strong brand awareness tend to perform better. The company is learning from its experiences and plans to scale down the size and cost of future drive-thrus. They also focus on operational improvements and are optimistic about drive-thru in traditionally stronger markets.
We fully expect a bullish margin outlook for 2024!
In 2023, SHAK RLMs will have improved over 250 bps; how much more can they see in 2024? The company is in the early stages of refining its staffing models, considering various factors such as menu mix, channel mix, and format. They aim to maximize efficiency, especially during peak times. Tests for the new staffing models are planned for the end of the year and into the next. More details will be shared as they progress. While specific guidance for 2024 isn't provided yet, the company is committed to identifying opportunities for margin expansion, starting with supply chain efficiencies. They've made significant progress in increasing EBITDA margins and expect continued leverage in G&A. The focus is on profitability and tackling opportunities "one by one."
The slowdown in traffic is apparent!
Shake Shack has not been cautious with pricing, although it is rolling off a high single-digit increase from last year. To maximize margins in 4Q23, they took a slight 1% price increase in October. The 3Q23 decline in traffic is concerning; the 2-year stack decelerated 390 bps QoQ. They monitor inflationary pressures, especially in beef and fries, and will consider price increases if necessary. They want to ensure long-term value and are cautious about consumer sensitivity, but they are raising prices nonetheless.
4Q23 Has Easy Comps
Regarding October comps, the company rolled off a high single-digit price increase in the middle of the quarter and exited December at about 3.5%. October comps were roughly flat on traffic, which was an improvement from negative traffic periods toward the end of the third quarter.
Emerging Themes and Concerns
- Geopolitical Headwinds: Acknowledgement of Challenges in the Middle East and Asia
- Inflationary Pressures: Concerns about beef inflation and its impact on costs
- Consumer Behavior: Uncertainty around consumer spending patterns
- Digital Marketing: Transitioned from high single-digit to low single-digit menu prices, with positive growth in both in-shack and digital sales.
- Labor Efficiency: Improved staffing levels and retention lead to more efficient labor usage despite wage investments.
BLMN has more excuses
Bloomin' Brands Beats Q3 Expectations but Cautions on Softer Casual Dining Environment
Bloomin' Brands reported stronger-than-expected 3Q23 EPS but provided a cautious outlook for the remainder of the year. The company's Q3 EPS of $0.44 exceeded FactSet's consensus of $0.41, while revenue matched expectations at $1.08 billion. However, 4Q23 EPS guidance falls short of expectations, and the company has revised its full-year guidance downwards, citing a softer casual dining environment and accelerated capital expenditure. The Q4 EPS is forecasted to be between $0.64 and $0.74, excluding items, which is below the FactSet consensus of $0.77. U.S. comparable restaurant sales are expected to be flat to 1%. This is leading to Adjusted FY23 EPS guidance to $2.80-2.90, down from the previous $2.91-3.00 and in line with FactSet's $2.90 consensus; U.S. comparable restaurant sales projections have been lowered to 1.5%-2% from the prior 2%-4% guidance. Here is the most disturbing part Capital expenditures are now anticipated to be between $260M-280M, an increase from the previous $240M-260M forecast, due to the acceleration of project spending into FY23 from FY24.
- Reasons for Revised Guidance:
- The adjustment in guidance is primarily attributed to reduced traffic assumptions across Bloomin' Brands' portfolio, reflecting a softer casual dining environment.
- The company is also updating its capital expenditure expectations due to accelerating project spending into FY23 from FY24.
These outcomes are unlikely to bring joy to Starboard or any valued shareholders. Allow me to reemphasize a point I made in our recent BLMN presentation: the current CEO lacks the skill set that is required to take the company to the next level, particularly for a shareholder as discerning as Starboard. The company's excuse for the miss is that they are considering the challenges posed by a more subdued casual dining landscape and deliberate choices they have made to intensify investments in this fiscal year. Wat about the investments they made in 2022? Were they not intended to offset a sluggish casual dining environment? What about the marketing plan? New products and menu innovation? Now it's only natural for shareholders to wonder about the returns on these additional investments and what the ROI is.
