1280Px Starbucks Española1

STARBUCKS Q3 RESULTS BEAT ESTIMATES, BUT IT’S NOT THE CAPUCCINOS!

Analysis

Starbucks is performing well in key markets, with the exception of China, where the world’s largest coffee chain is having to rethink its strategy due to poor results.

But as anyone who follows TikTok’s army of Starbucks influencers can attest, it’s not the cappuccinos or the flat whites that attract customers; it’s the cold drinks. In the global heat wave, that’s never been truer, and interim chief executive Howard Schultz says the company has withstood the pricing pressures that have hit other restaurant chains such as McDonald’s.

Schultz believes that the more affluent customers are less affected by the cost-of-living crisis that many countries are facing as they deal with inflation-related price increases. While McDonald’s customers sometimes have to make tough choices about where to spend their limited budgets, Starbucks customers generally have more disposable income and, Schultz says, loyalty to the brand.

The shares rose about 1% in trading as the results beat analysts expectations:

  • The market expected 75 cents Earnings per share (EPS): Starbucks delivered 84 cents adjusted
  • The market expected Revenue of $8.11 billion; Starbucks delivered Revenue: $8.15 billion

Other Key Numbers

  • Consolidated Net Revenues Up 9% to a quarterly record $8.2 Billion
  • Q3 Comparable Store Sales Up 3% Globally; Up 9% in the U.S. and Up Double Digits Internationally, ex-China
  • Q3 GAAP EPS $0.79; Non-GAAP EPS of $0.84, Driven by U.S. Performance and Global Demand Outside of China
  • Active Starbucks® Rewards Membership Up 13% in the U.S. in Q3 to 27.4 Million Members

China, however, is a major concern for the company. I know from talking to my Chinese friends that they say Starbucks is not cool anymore. There are other cheap coffee brands, but the increasing appreciation of speciality coffee has led to the emergence of small trendy coffee shops offering high-quality speciality coffee.

Press Release

SEATTLE–(BUSINESS WIRE)– Starbucks Corporation (NASDAQ: SBUX) today reported financial results for its 13-week fiscal third quarter ended July 3, 2022. GAAP results in fiscal 2022 and fiscal 2021 include items that are excluded from non-GAAP results. Please refer to the reconciliation of GAAP measures to non-GAAP measures at the end of this release for more information.

Q3 Fiscal 2022 Highlights

  • Global comparable store sales increased 3%, driven by a 6% increase in average ticket, partially offset by a 3% decline in comparable transactions
    • North America comparable store sales increased 9%, driven by an 8% increase in average ticket and a 1% increase in comparable transactions; U.S. comparable store sales increased 9%, primarily driven by an 8% increase in average ticket
    • International comparable store sales decreased 18%, driven by a 15% decline in comparable transactions and a 4% decline in average ticket; China comparable store sales decreased 44%, driven by a 43% decline in comparable transactions and a 1% decline in average ticket
  • The company opened 318 net new stores in Q3, ending the period with 34,948 stores globally: 51% company-operated and 49% licensed
    • At the end of Q3, stores in the U.S. and China comprised 61% of the company’s global portfolio, with 15,650 stores in the U.S and 5,761 stores in China
  • Consolidated net revenues up 9% to a quarterly record $8.2 billion, including a 2% adverse impact from foreign currency translation
  • GAAP operating margin of 15.9% decreased 400 basis points from 19.9% in the prior year, primarily driven by inflationary pressures, investments in labor including enhanced store partner wages as well as sales deleverage related to COVID-19 restrictions in China, partially offset by pricing in North America and leverage across markets outside of China
    • Non-GAAP operating margin of 16.9% decreased from 20.4% in the prior year
  • GAAP earnings per share of $0.79, down from $0.97 in the prior year
    • Non-GAAP earnings per share of $0.84, down from $0.99 in the prior year
  • Starbucks® Rewards loyalty program 90-day active members in the U.S. increased to 27.4 million, up 13% year-over-year

“We have clear line-of-sight on what we need to do to reinvent the company, elevate our partner and customer experiences and drive accelerated, profitable growth all around the world,” said Howard Schultz, interim chief executive officer. “The Q3 results we announced today demonstrate the early progress we have made in just four short months,” Schultz added.

“We delivered record-breaking revenue performance during the quarter from continued strength in customer demand globally, balanced with our ability to execute investments despite macroeconomic and operational headwinds. Our commitment to deliver shareholder value has not wavered, and we are making the right decisions and investments today for the future of Starbucks,” commented Rachel Ruggeri, chief financial officer.

Q3 North America Segment Results (1)
      
 Quarter Ended Change (%)
($ in millions)Jul 3, 2022 Jun 27, 2021 
Change in Comparable Store Sales (2)9% 84%  
Change in Transactions1% 82%  
Change in Ticket8% 1%  
Store Count17,050 16,752 2%
Revenues$6,058.4 $5,370.7 13%
Operating Income$1,330.1 $1,304.3 2%
Operating Margin22.0% 24.3% (230) bps
(1)North America store count, revenues, operating income and operating margin for the quarter ended June 27, 2021, have been restated to conform with current period presentation.
(2)Includes only Starbucks® company-operated stores open 13 months or longer. Comparable store sales exclude the effects of fluctuations in foreign currency exchange rates and Siren Retail stores. Stores that are temporarily closed or operating at reduced hours due to the COVID-19 pandemic remain in comparable store sales while stores identified for permanent closure have been removed.
 

Net revenues for the North America segment grew 13% over Q3 FY21 to $6.1 billion in Q3 FY22, primarily driven by a 9% increase in company-operated comparable store sales, driven by an 8% increase in average ticket and a 1% increase in transactions, net new store growth of 2% over the past 12 months and strength in our licensed store sales.

Operating income increased to $1,330.1 million in Q3 FY22, up from $1,304.3 million in Q3 FY21. Operating margin of 22.0% contracted from 24.3% in the prior year, primarily driven by higher commodity and supply chain costs due to inflationary pressures, investments in labor including enhanced store partner wages as well as increased spend on partner training support costs. This contraction was partially offset by pricing.

Q3 International Segment Results (1)
      
 Quarter Ended Change (%)
($ in millions)Jul 3, 2022 Jun 27, 2021 
Change in Comparable Store Sales (2)(18)% 41%  
Change in Transactions(15)% 55%  
Change in Ticket(4)% (9)%  
Store Count17,898 16,543 8%
Revenues$1,584.7 $1,688.0 (6)%
Operating Income$135.3 $327.3 (59)%
Operating Margin8.5% 19.4% (1,090) bps
(1)International store count, revenues, operating income and operating margin for the quarter ended June 27, 2021, have been restated to conform with current period presentation.
(2)Includes only Starbucks® company-operated stores open 13 months or longer. Comparable store sales exclude the effects of fluctuations in foreign currency exchange rates and Siren Retail stores. Stores that are temporarily closed or operating at reduced hours due to the COVID-19 pandemic remain in comparable store sales while stores identified for permanent closure have been removed.
 

Net revenues for the International segment declined 6% over Q3 FY21 to $1.6 billion in Q3 FY22, driven by an 18% decline in comparable store sales, primarily attributable to COVID-19 related restrictions in China, as well as a 9% adverse impact from foreign currency translation. These decreases were partially offset by growth in our licensed store revenue including higher product sales, royalty revenues and the conversion of the Korea market from a joint venture to a fully licensed market in Q4 FY21, as well as 1,355 net new store openings, or 8% store growth, over the past 12 months.

Operating income decreased to $135.3 million in Q3 FY22 compared to $327.3 million in Q3 FY21. Operating margin of 8.5% contracted from 19.4% in the prior year, primarily driven by sales deleverage related to COVID-19 restrictions in China, higher commodity and supply chain costs due to inflationary pressures, lower government subsidies and investments in store partner wages, partially offset by sales leverage across markets outside of China.

Q3 Channel Development Segment Results
      
 Quarter Ended Change (%)
($ in millions)Jul 3, 2022 Jun 27, 2021 
Revenues$479.7 $414.0 16%
Operating Income$191.7 $216.0 (11)%
Operating Margin40.0% 52.2% (1,220) bps

Net revenues for the Channel Development segment grew 16% over Q3 FY21 to $479.7 million in Q3 FY22, driven by growth in the Global Coffee Alliance and ready-to-drink business.

Operating income decreased to $191.7 million in Q3 FY22 compared to $216.0 million in Q3 FY21. Operating margin of 40.0% contracted from 52.2% in the prior year, primarily due to lapping Global Coffee Alliance transition related activities and a decline in our North American Coffee Partnership joint venture income, largely due to inflationary pressures as well as business mix shift.

Fiscal 2022 Financial Targets

The company’s guidance remains suspended for the balance of this fiscal year. Its Q3 FY22 earnings conference call will start today at 2:00 p.m. Pacific Time. These items can be accessed on the company’s Investor Relations website during and after the call. The company uses its website as a tool to disclose important information about the company and comply with its disclosure obligations under Regulation Fair Disclosure.

Company Updates

  1. Since its announcement in May, the company has worked with its licensed operator to exit its business and brand in Russia and to support the nearly 2,000 green apron partners in Russia, including pay for six months and assistance for partners to transition to new opportunities outside of Starbucks.
  2. In May, the company announced entry into a definitive agreement for Bolthouse Farms to acquire the brand and business of Evolution Fresh. The acquisition closed on August 1, 2022. Participating U.S. Starbucks stores continue to sell Evolution Fresh products.
  3. In June, the company expanded U.S. healthcare benefits to ensure partners (employees) have access to quality healthcare. The benefit will reimburse partners enrolled in a Starbucks healthcare plan for eligible travel expenses to access an abortion or gender-affirming procedures when those services are not available within 100 miles of a partner’s home.
  4. In June, the company announced the creation of the Heritage Market, connecting three of the company’s most iconic and visited stores and partners who lead them. Partners at these stores will be uniquely trained in the company’s heritage and hometown to offer regular tours and immersions for customers. Together, the three stores in Starbucks hometown of Seattle represent the company’s historic past, present and reimagined future.
  5. In June, the company announced that indoor dining services had resumed at most Starbucks locations across Shanghai, marking another milestone in the company’s COVID journey.
  6. In July, the company reaffirmed its commitment to create a safe, welcoming and kind third place environment through select additional measures, including robust safety trainings, clarifying procedures, modifying operations and closing stores where needed. This important work will directly shape the company’s policies, programs and benefits to ensure partners feel supported and empowered.
  7. In July, the company shared a set of principles and a new partnership for the reinvention of the next chapter of the company. The reinvention plan will include five strategic shifts: reunite the company to bring its mission to life, renew the well-being of retail partners by improving their experience, reimagine the store experience for greater connection, reconnect with customers by delivering memorable and personalized moments and redesign partnership by creating new ways to thrive together.
  8. The Board of Directors declared a cash dividend of $0.49 per share, payable on August 26, 2022, to shareholders of record as of August 12, 2022.

Photo Source: Fadesga, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons

Author

  • Nick 2017 500X500 1

    organisation:

    Nick Baskett is the editor in Chief at Bartalks. He holds a diploma from the Financial Times as a Non Executive Director and works as a consultant across multiple industries. Nick has owned multiple businesses, including an award-winning restaurant and coffee shop in North Macedonia.

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