The street is decidedly negative (25% of the ratings are Buys) on Starbucks relative to the other large capitalization QSR restaurant companies, according to Thompson/Reuters. Interestingly, the company with the biggest rating is Burger King (75% of the ratings are Buys) and it is the worst performing QSR stock: down 30% this year. The fact that there is a large Private Equity firm with a big position has nothing to do the analyst opinion of the company.
I still believe that there is a significant catalyst coming for Starbucks when we settle the perception that McDonald's McCafe is not taking significant share from SBUX. We are getting closer to that day.
I don't care how negative people are on Starbuck's; the core of the business model is very healthy and is showing very sustainable trends that were not there three to six months ago. For the past two quarters the company has posted sequential improvements in operating margins and will report year-over-year improvement in 3Q and 4Q of 2009. This is directly attributable to the progress SBUX has made on its cost cutting initiatives. In 2Q09, SBUX delivered $120 million in cost savings, exceeding the $100 million target. For the balance of the fiscal 2009, SBUX has cost savings of approximately $150 million in 3Q09 and $175 million in 4Q09. In order to sustain continued stock price appreciation, SBUX cannot rely on cost saving initiatives alone. Investors will expect to see an improvement in same-store sales to keep the stock working.
That being said, I set out to come up with a way to gauge SBUX's progress toward improving monthly sales trends, which resulted in the inception of the SBUX monthly "grass roots survey." The stores surveyed represent a geographic mix across the U.S.
STARBUCKS MARCH "GRASS ROOTS SURVEY" SALES TRENDS:
The survey indicates that May same-store sales on average were flat to -1%. This compares to our previous survey indicating that March same-store sales on average were flat to -3%. As I said in March, these numbers are so good I don't believe what I'm seeing. Naturally, I provided a haircut to the numbers, but that would still put SBUX same-store sales at down 3-4% versus 5-7% in March.
This would be a significant improvement from the trends in fiscal 2Q09 when same-store sales declined 8%. I continue to think that it is more important to focus on the numbers on a directional basis, rather than looking at the absolute numbers, and directionally, these May numbers look better than what we have been seeing for some time from Starbucks' U.S. business. These numbers are even more impressive given that McDonald's was heavily promoting McCafe in May.
Other highlights of the survey:
(1) 80% of the stores reported a sequential improvement in sales trends in May from April
(2) 58% of the stores reported positive comps up from 21% in March - the average was +4%
(3) The stores reporting negative comps were down 5-6%
(4) The average number of breakfast combo's was 14 in May down from 19 in March. Note that 1/3 of the stores in March were not selling breakfast combo's yet
(5) Suggestive selling helps improve the attach rate of combo's.
Right now, I think SBUX could be tracking down 5-6% in same-stores sales for 3Q09.