Starbucks (SBUX) has reported yet another quarter of declining sales, missing both revenue and same-store sales growth expectations. In the third quarter, the company's revenue dropped by 1% to $9.1 billion, falling short of Bloomberg consensus estimates of $9.20 billion. Additionally, global same-store sales decreased by 3%, marking the second consecutive quarter of decline, while overall foot traffic dropped by 5%.
However, there was a slight positive in the adjusted earnings per share, which came in at $0.93, just above the expected $0.92.
In a statement, CEO Laxman Narasimhan highlighted that their three-part action plan "is beginning to work and driving operational improvements that we expect to improve financial performance," aiming to "return the business to sustainable growth." This plan, introduced after the second quarter results, focuses on increasing customer visits throughout the day, launching new products while emphasizing core coffee offerings, and providing better value.
The average transaction value saw a modest increase of 2%, attributed to menu price hikes. This quarter, Starbucks introduced new items such as popping boba-like pearls and iced energy drinks. They also offered a limited-time "pairing menu," where customers could get a small iced or hot coffee paired with a butter croissant or breakfast sandwich for $5 or $6.
Despite these efforts, U.S. same-store sales declined by 2%. Before these results, Deutsche Bank analyst Lauren Silberman, who maintains a Hold rating on the stock, noted that "sentiment on Starbucks continues to lean negative ... [it] has been less topical than other large caps and relative to the past few quarters."
Baird analyst David Tarantino suggested that "cyclical macro issues" might be contributing to the sales decline, anticipating weaker sales throughout most of fiscal 2024 as consumers reduce discretionary spending, including afternoon visits to Starbucks. He also holds a Hold rating on the shares.
This earnings report arrives amidst growing pressure from activist investor Elliott Investment Management, which has acquired an undisclosed stake in Starbucks, according to the Wall Street Journal. Bernstein analyst Danilo Gargiulo commented that although investors have questioned Elliott’s expertise in the consumer sector, an external push might accelerate significant decisions and present intriguing risk-reward opportunities for long-term investors prepared for a gradual turnaround.
China, Starbucks' second-largest market, experienced the most significant decline among its segments. Same-store sales in China fell by 14%, compared to an 11% decrease in the previous quarter. Foot traffic in China dropped by 7%, and the average transaction size also declined.
Bank of America analyst Sara Senatore connected Starbucks' performance in China to broader industry challenges. "Intense competition is the natural state of restaurant markets and even the strongest brands are not insulated," she stated. "The direction of SBUX's China same-store sales growth is strongly correlated with those of other global brands. And all are correlated with macro factors (GDP)."
Echoing this sentiment, McDonald's (MCD) also reported declining sales growth in China during its second quarter results, citing weak consumer sentiment in a highly competitive market.
Gargiulo believes that franchising might be a viable strategy for Starbucks in China, offering "an equally compelling alternative to leverage buildout of one of the biggest coffee markets without the capital allocation" and reducing exposure to "fluctuating macro-economic conditions." The company still plans to operate 9,000 locations in China by 2025.
Following the second quarter, Starbucks revised its 2024 outlook for the third time this fiscal year. It now anticipates global revenue growth in the low single digits, down from the previous range of 7% to 10%, which was itself a downgrade from earlier projections of 10% to 12%. Global and U.S. same-store sales are expected to either decline slightly or remain flat, a reduction from the previous forecast of 4% to 6% growth. China's same-store sales are projected to see a single-digit decline, a reversal from the previously expected low-single-digit growth.
Starbucks plans to provide further updates on its 2024 outlook during an upcoming call with investors. However, CEO Laxman Narasimhan and CFO Rachel Ruggeri were not available for interviews.
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