In This Article:
Key Points
-
Starbucks just delivered an uninspiring fiscal second-quarter report.
-
While its new CEO -- poached from Chipotle -- is certainly offering a new approach, nothing seems to be helping yet.
-
A turnaround might be underway, but if it is, it's happening slowly, making the stock a tough buy at present.
The story of Starbucks (NASDAQ: SBUX) today is the story of a giant trying to figure out how to keep its growth train going. The company's most recent results did not provide much inspiration. The changes begun by its still-fairly new CEO -- formerly the head of Chipotle (NYSE: CMG) -- haven't yet yielded the results that people were hoping for. Given the weak results, it seems that a turnaround for the company, which has seen things slow down quite a bit over the last two years, might take much longer than originally thought.
Tough results
Put simply, these results could have been better. The fiscal quarter that ended March 30 was the company's fifth straight period reporting a decline in same-store sales. Total comp store sales declined by 1%, and total comparable transactions declined by 2%. This shows that its 2% increase in net revenues stemmed from the increase in the number of stores. In addition, the 1% increase in the average ticket size drove up total expenditures per transaction, offsetting the weakness in overall transactions. In all, earnings declined by 50% in the quarter to $0.34 per share.
One of the main headaches for the chain has been its domestic market. Same-store sales in North America declined 1% in the quarter, with total transactions falling by 4%. The weakness in terms of traffic was offset by a 3% growth in the average ticket size.
That North American sales weakness is undermining the company's expansion internationally. International comp store sales actually increased by 2%, with a 3% increase in transactions, with an actual decrease of 1% in ticket size.
The costs of the company's "back to Starbucks" initiatives are having a notable impact on its operating performance. Operating income for the quarter was down 45.3% year over year to $601 million, and the aforementioned decline in net earnings per share followed a similar trend. The main culprit in the financial statements is an increase in "store operating expenses", which increased 12.1% during the quarter. I think this can be partially attributed to Starbucks reversing its trend on labor.
A failed attempt at automation and a CEO trying to right the ship
One of the strategies that Starbucks attempted in its efforts to improve its financial results in recent years was to increase automation. But as a recent article in The Guardian notes, it didn't work. Better equipment wasn't a good substitution for more staff at the stores. On a call with investors last month, reported the newspaper, CEO Brian Niccol acknowledged that the chain had been reducing staff in its coffee shops over the last few years, but said that the new plan is to pivot back to increasing store staff.