THE HEDGEYE EDGE
Starbucks Corporation (SBUX), on its 4Q17 earnings call on November 2nd, reduced its long-term growth algorithm, but left 2018 EPS estimates unchanged. The announcements made by the company essentially raised the noise in the P&L, and will make it harder to get a true read on how the business will do in 2019 and beyond.
If you left it up to the Starbucks management team, they would tell you that things couldn’t be better. But the numbers tell a different story, as the overall business continues to slow. Our SHORT thesis includes the beliefs that technology is no longer a differentiator for the brand and our concern regarding Kevin Johnson as the new CEO.
This most recent earnings call did nothing to shift our thinking, if anything, our concerns were justified. The Company has gone all in on mobile order & pay, and will be opening the once exclusive program to all customers, not just loyalty members. By doing this, SBUX has essentially hit the BIG RED PANIC BUTTON, in the hopes that it can once again drive increased adoption and return to being the technology juggernaut it once was.
INTERMEDIATE TERM (TREND)
Turning to loyalty growth and SSS, it is clear that no real recovery has begun in this business. SBUX loyalty member growth was up against an easy comp in 4Q17, so the 11% YoY growth (see below) is not impressive. Loyalty member growth was flat sequentially and have been at 13.3M members for three consecutive quarters.
Consolidated SSS was +2% in 4Q17, and this is a 100bps sequential deceleration on the two-year average, which has slowed by 300bps since 4Q16. A similar trend can be seen with regard to Americas SSS, which came in at +2.0% (+3.0% adjusting for the hurricanes), a 100bps deceleration on the two-year average, which has slowed by 300bps since 4Q16.
LONG TERM (TAIL)
The success of the SBUX business in the long term will rest on how strategic actions improve returns and revenues. The pending acquisition of the remaining 50% of their East China operations, the closing of Teavana stores and the SBUX e-commerce platform, and selling of TAZO are among the changes that management believes will add 2-3 percentage points to 2018 revenue growth. From what we can tell, the Company wants investors to focus on China going forward, but what multiple do you put on the China business? In addition, selling the tea business is a distraction, as it creates the image that SBUX is offloading and getting more lean, but it is actually meaningless to the bigger picture.
ONE-YEAR TRAILING CHART
