Starbucks (SBUX) is on the Hedgeye Restaurants SHORT bench.
HEDGEYE OPINION
Where do we begin...Should we start with the fact that Mobile Order & Pay is causing more problems than solutions? Or should we begin with management attributing disappointing same-store sales to an issue that was prevalent at less than 7.5% of their stores? Maybe we should start with pointing out that management is still insisting on making food a staple of the business… No matter where we start, it is clear that SBUX has many roadblocks ahead, both self-inflicted and macro-driven.
Starbucks reported disappointing 1Q17 earnings after the close yesterday, but instead of laying it all out on the table, and addressing the issues head-on, management decided it would be best to dance around the problems they are facing, in a ploy to put a positive spin on things. SBUX reported $5.73B vs FactSet $5.85B, with consolidated same-store sales coming it at +3%, well below FactSet’s +3.8% estimate. In an unusual turn of events, management blamed the company’s disappointing comps on a bottleneck that had occurred at 1,200 SBUX units in the US, where Mobile Order & Pay had caused “congestion” during peak times, resulting in patrons opting to not buy coffee from these units. This is a stretch, to say the least. Additionally, to address these bottlenecks, management will be redeploying, and at times adding, labor to accommodate for the increased traffic. This will put pressure on margins going forward.
As we touched on before, SBUX’s Mobile Order & Pay platform had a banner year, representing more than 7% of total transactions, doubling the figure from the same period a year ago. However, the operational challenges mentioned above were a result of their Mobile Order & Pay platform, which means that a platform tasked with making life easier has actually done the opposite. The congestion issue was only prevalent at 1,200 units, but we will be watching closely to see if it rears its head at additional units as time goes on.
Furthermore, management continues to expect mid-single digit comparable store sales growth globally, with the first half of the year lower and some improvement in the second half of the year. This is quite a lofty expectation, as it assumes that the macro environment will improve as the year progresses, allowing for accelerated comps, revenue, and profitability in the second half of the year once SBUX’s suggestive selling capabilities are rolled out. Black Box data tells us a different story, as both comparable sales and comparable traffic continue their precipitous decline, with no bottom in sight.
We remain comfortably SHORT SBUX.
NOTABLE COMPANY THOUGHTS
“Having said that, we still believe that the holiday season, for us, was not significantly affected by the downturn in traffic. It was more the things that we already discussed that are in our control, and in a sense, the self-induced issue of the success of Mobile Order & Pay.” (Howard Schultz, CEO)
HEDGEYE – Mobile Order & Pay causing issues for the company is something to keep a close eye on as time goes on. Management is pointing to internal problems that they believe are “fixable” versus accepting that their business can be affected by what is going on around them.
“But nevertheless, we are all trying to navigate through a difficult time. I would label this time as just a high degree of uncertainty that obviously is domestically driven but has affected the rest of the world.” (Howard Schultz, CEO)
HEDGEYE – The challenging macro environment persists, and SBUX is not immune.
“Mobile Order & Pay had a banner quarter representing more than 7% of total transactions. Double the figure from Q1 last year, and now we have nearly 1,200 stores with 20% or more Mobile Order & Pay transactions at peak, compared to only 13 stores one year ago,” (Kevin Johnson, President & COO).
HEDGEYE – Management pointed to the bottlenecks created by the aggressive adoption of Mobile Order & Pay as a major cause for their underperformance this quarter. However, this issue was only prevalent at 1,200 stores; SBUX has ~16k units in the US, so we find it hard to believe that an issue at less than 7.5% of the units had such a significant effect on same-store sales.
“We’re also looking at enhanced food offerings and building out a more robust food capacity within our stores,” (John Culver, Group President, Starbucks Global Retail)
HEDGEYE – According to management, food sales grew 8% YoY and contributed a full point to the comp; this performance represents a continued deceleration in its food program. SBUX is losing focus of what they do best. This is a coffee company, not a food company and the brand will continue to underperform if it continues down this road.
“And I think as I said in may prepared remarks, there's such evidence for us that we are going to be one of the true winners, regardless of what happens with those retailers and especially those retailers that are going to suffer significantly from the down-turn of traffic as a result of e-commerce and mobile purchasing online but I think we're in a unique position. Obviously, it affected comps this quarter. But it's a very good problem to solve, and then when you look at, you know, the $2 billion loaded on Cards that is sitting on the balance sheet for Starbucks, I mean, is there a company -- is there a retail company, a retail brand, that is in this kind of position?” (Howard Schultz, CEO)
HEDGEYE – Starbucks’ management is attempting to divert our attention from what is most important here…THEY MISSED ESTIMATES. It is delusional to point to money loaded on cards to prove that you have sales growth coming down the pike.
QUICK COMPS
- 1Q17 EPS: $0.52 vs FactSet $0.52
- Revenue: $5.73B vs FactSet $5.85B
- Consolidated Comps: +3% vs FactSet +3.8%
- Americas +3% vs FactSet +3.9%
- EMEA -1% vs FactSet +1.7%
- CAP +5% vs FactSet +2.9%
- Americas
- Revenue: $3.88B vs FactSet $4.05B
- Operating Margin: 24% vs FactSet 24.1%
- EMEA
- Revenue: $262.4M vs FactSet $273.2M
- Operating Margin 16.8% vs FactSet 15.8%
- CAP
- Revenue: $770.8M vs FactSet $780.8M
- Operating Margin: 21.2% vs FactSet 21.0%
- Channel Development
- Revenue: $553.7M vs FactSet $552.4M
- Operating Margin: 43.9% vs FactSet 42.2%
- Costs of Sales including occupancy: 40.0% vs FactSet 39.6%
- Consolidated operating margin 20.0% vs FactSet 19.9%
FY17 Guidance
- Reaffirmed EPS: $2.12 - $2.14 vs FactSet $2.14
- Continue to expect mid-single digit comparable store sales growth globally
- Consolidated revenue growth now expected to be in the range of 8%-10%
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
