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Starbucks (NASDAQ:SBUX) Misses Q1 Sales Targets


Full Report / January 30, 2024

Coffeehouse chain Starbucks (NASDAQ:SBUX) missed analysts' expectations in Q1 FY2024, with revenue up 8.2% year on year to $9.43 billion. It made a non-GAAP profit of $0.90 per share, improving from its profit of $0.75 per share in the same quarter last year.

Starbucks (SBUX) Q1 FY2024 Highlights:

  • Market Capitalization: $106.2 billion
  • Revenue: $9.43 billion vs analyst estimates of $9.63 billion (2.1% miss)
  • EPS (non-GAAP): $0.90 vs analyst expectations of $0.94 (4.1% miss)
  • Free Cash Flow of $1.79 billion, up 43.6% from the previous quarter
  • Gross Margin (GAAP): 27.5%, up from 25.7% in the same quarter last year
  • Global Same-Store Sales were up 5% year on year (miss vs. expectations of up 6.7% year on year)
  • Store Locations: 38,587 at quarter end, increasing by 2,417 over the last 12 months

Started by three friends in Seattle’s historic Pike Place Market, Starbucks (NASDAQ:SBUX) is a globally-renowned coffeehouse chain that offers a wide selection of high-quality coffee, beverages, and food items.

Specifically, the company was founded when Jerry Baldwin, Zev Siegl, and Gordon Bowker opened a humble coffee shop in 1971. Their goal was to create a unique, intimate coffeehouse experience where customers could savor freshly brewed coffee while connecting with their communities.

Starbucks’ growth trajectory hit an inflection point in 1982 when it hired Howard Schultz as its director of retail operations and marketing. Schultz played a pivotal role in the company’s expansion and broadened its offerings to include iced beverages, teas, seasonal specialties, food items, and merchandise, catering to a diverse range of tastes and preferences.

Today, Starbucks differentiates itself in a crowded field by focusing on quality, consistency, and customer experience. Each Starbucks store is designed to create a warm and inviting atmosphere, with cozy seating areas and high-speed Wi-Fi, encouraging customers to stay in the store for however long they wish.

Starbucks was also quick to recognize the power of technology. The company’s mobile app allows customers to pre-order items (enabling them to get in and out of the store in less than 30 seconds), pay through their smartphones, customize beverages, and earn compelling rewards.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Some competitors that sell caffeinated beverages and small bites include private company Dunkin’ as well as public companies Dutch Bros (NYSE:BROS), McDonald’s (NYSE:MCD), and Tim Hortons (owned by Restaurant Brands, NYSE:QSR).

Sales Growth

Starbucks is one of the most widely recognized restaurant chains in the world and benefits from brand equity, giving it customer loyalty and more influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new restaurants and grew sales at existing, established dining locations.

Starbucks Total Revenue

This quarter, Starbucks's revenue grew 8.2% year on year to $9.43 billion, missing Wall Street's expectations. Looking ahead, Wall Street expects sales to grow 9.9% over the next 12 months, an acceleration from this quarter.

Number of Stores

A restaurant chain's total number of dining locations is a crucial factor influencing how much it can sell and how quickly company-level sales can grow.

When a chain like Starbucks is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Starbucks's restaurant count increased by 2,417, or 6.7%, over the last 12 months to 38,587 locations in the most recently reported quarter.

Starbucks Operating Retail Locations

Over the last two years, Starbucks has rapidly opened new restaurants, averaging 5.8% annual increases in new locations. This growth is among the fastest in the restaurant sector. Analyzing a restaurant's location growth is important because expansion means Starbucks has more opportunities to feed customers and generate sales.

Same-Store Sales

Same-store sales growth is an important metric that tracks organic growth and demand for a restaurant's established locations.

Starbucks has been one of the most successful restaurants over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted solid year-on-year same-store sales growth of 9.13%. With positive same-store sales growth amid an increasing number of restaurants, Starbucks is reaching more diners and growing sales.

Starbucks Year On Year Same Store Sales Growth

In the latest quarter, Starbucks's same-store sales rose 10% year on year. This growth was an acceleration from the 3% year-on-year increase it posted 12 months ago, which is always an encouraging sign.

Same-Store Sales

Starbucks's demand within its existing restaurants has generally risen over the last two years but lagged behind the broader sector. On average, the company's same-store sales have grown by 7% year on year. With positive same-store sales growth amid an increasing number of restaurants, Starbucks is reaching more diners and growing sales.

Starbucks Year On Year Same Store Sales Growth

In the latest quarter, Starbucks's same-store sales rose 5% year on year. This growth was in line with the 5% year-on-year increase it posted 12 months ago.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells.

Starbucks's gross profit margin came in at 27.5% this quarter. up 1.8 percentage points year on year. This means the company makes $0.27 for every $1 in revenue before accounting for its operating expenses. Starbucks Gross Margin (GAAP)

Starbucks's unit economics are higher than the typical restaurant company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see above, it's averaged a decent 26.8% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 8% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more stable input costs (such as ingredients and transportation expenses).

Operating Margin

Operating margin is a key profitability metric for restaurants because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Starbucks generated an operating profit margin of 15.8%, up 1.4 percentage points year on year. This increase was solid and driven by stronger pricing power or lower ingredient/transportation costs, as indicated by the company's larger rise in gross margin.

Starbucks Operating Margin (GAAP)

Zooming out, Starbucks has managed its expenses well over the last two years. It's demonstrated solid profitability for a restaurant business, producing an average operating margin of 15.4%. On top of that, its margin has improved, on average, by 2.4 percentage points each year, a great sign for shareholders.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q1, Starbucks reported EPS at $0.90, up from $0.75 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

Starbucks EPS (Adjusted)

Between FY2020 and FY2024, Starbucks's adjusted diluted EPS grew 26.2%, translating into an unimpressive 6.6% average annual growth rate. This growth, however, is materially higher than its revenue growth over the same period, showing that Starbucks has excelled in managing its expenses (leading to higher profitability).

On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 15.2% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Starbucks's free cash flow came in at $1.79 billion in Q1, up 66.1% year on year. This result represents a 19% margin.

Starbucks Free Cash Flow Margin

Over the last two years, Starbucks has shown strong cash profitability, giving it an edge over its competitors and the option to reinvest or return capital to investors while keeping cash on hand for emergencies. The company's free cash flow margin has averaged 9.1%, quite impressive for a restaurant business. Furthermore, its margin has averaged year-on-year increases of 5.3 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS growth informs us whether a company's revenue growth was profitable. But was it capital-efficient? For example, if two companies had the same EPS growth, we’d prefer the one putting up those numbers with lower capital requirements (usually in the form of balance sheet debt and equity).

Understanding a company’s long-term ROIC (return on invested capital) gives another level of insight because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also its management team's decision-making prowess (because they're the individuals dictating what the company invests in).

Starbucks's five-year average ROIC was 113%, placing it among the best restaurant companies. Just as you’d like your investment dollars to generate returns, Starbucks's invested capital has produced excellent profits. The trend in its ROIC, however, is often what surprises the market and drives the stock price.

Key Takeaways from Starbucks's Q1 Results

We struggled to find many strong positives in these results. Same store sales missed, leading to a consolidated revenue miss. Gross margin also missed analysts' expectations, flowing down to an EPS miss. Guidance will be given on the earnings call. Overall, this was a mediocre quarter for Starbucks. The stock is up 2.3% after reporting and currently trades at $96.3 per share, showing potentially lowered expectations going into the quarter.

Is Now The Time?

Starbucks may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Starbucks is a good business. First off, its revenue growth has been decent over the last four years, and growth is expected to increase in the short term. And while its projected EPS for the next year is lacking, its new restaurant openings have increased its brand equity. On top of that, its stellar ROIC suggests it has been a well-run company historically.

Starbucks's price-to-earnings ratio based on the next 12 months is 22.1x. There are definitely a lot of things to like about Starbucks, and looking at the consumer landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $109.9 per share right before these results (compared to the current share price of $96.3), implying they saw upside in buying Starbucks in the short term.

To get the best start with StockStory, check out our most recent stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.

Is Now The Time?

When considering an investment in Starbucks, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think Starbucks is a great business. For starters, its revenue growth has been decent over the last four years, and its growth over the next 12 months is expected to exceed that. Additionally, its new restaurant openings has increased its brand equity, and its high ROIC suggests it is well run and in a strong position for profitable growth.

Starbucks's price-to-earnings ratio based on the next 12 months is 23.2x. But looking at the consumer retail landscape today, Starbucks's qualities as one of the best businesses really stand out, and despite the higher multiple, we still like it at this price.

Wall Street analysts covering the company had a one-year price target of $115.1 per share right before these results, implying that they saw upside in buying Starbucks even in the short term.

To get the best start with StockStory, check out our most recent stock picks and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.