Global Coffee giant Starbucks reported a mixed set of second quarter results but did provide an improved outlook for the remainder of the year. It says results were dragged lower by a slower-than-expected recovery in its International segment.
Total group revenue was up 11% from the prior year to $6.7 billion, missing expectations of $6.8 billion. This was thanks to global comparable store sales increasing 15%, which was off a low base due to Covid-19 related disruptions the previous year. The uptick in sales was driven by a 19% increase in average basket size, but this was partially offset by a 4% decline in transaction volumes.
The Americas, Starbucks’ largest market, saw comparable store sales increase 9%, returning to pre-pandemic levels. The average ticket size increased 22% as customers bought larger and more expensive coffees and added food to their orders. This was offset by lower traffic volumes, which declined 10%.
International comparable store sales increased 35%, buoyed by a 7% increase in average basket size and 26% increase in total number of transactions. It was hampered by some European countries extending lockdowns in the period.
China, which had exited strict lockdowns sooner than the rest of the world, saw comparable store sales increase 91%, with transaction volumes rising 93%, whilst average ticket prices declined 1%. Starbucks says operations in its second largest market, China, were still affected by the discouragement of nonessential travel by Chinese authorities even during the Chinese New Year holiday. International and China comparable store sales also included a Chinese VAT exemption benefit which was reinstated in January 2021, that boosted sales figures by 4% and 9% respectively.
· Group operating margins improved to 16.1%, from 9.2% in the prior year. This was primarily thanks to sales leverage from the business recovering, higher prices, temporary government subsidies, store consolidations, and the lapping of Covid-19 related costs in the prior year. These were partially offset by growth and investments in wages and benefits for store partners.
The company opened 5 net new stores in Q2, and now operates 32,943 stores globally. The net figure reflects the impact of around 300 store consolidations in the US and Canada to optimize its portfolio. Stores in the US and China made up 62% of the company’s geographic footprint as at the end of the second fiscal quarter, with 15,288 units in the US and 4,973 stores in China.
Net income for the fiscal second quarter rose 100.8% to $659.4 million, or 56 cents per share, reflective of the meaningful margin expansion. It ended the period with $3.88 billion in cash and cash equivalents, up 51% year on year. Free Cash Flows, cash a company generates after accounting for cash outflows to support operations and maintain its capital assets, improved to $2.25 billion in the fiscal second quarter from -$173.9 million in the prior year, emphasizing the impact Covid-19-related shutdowns had on the business.
Starbucks says it is using Artificial Intelligence to predict how inoculation rates will impact international sales growth, and maintained its sales growth estimates of 18% to 23% for the group for FY2021. It will also open 1,100 net new Starbucks stores and sees capital expenditures reaching approximately $1.9 billion this year. The company is forecasting FY2021 revenue of between $28.5 billion and $29.3 billion, inclusive of a $500 million impact attributable to a 53rd week in fiscal 2021 (as opposed to the normal 52 weeks). Consolidated non-GAAP operating margins are expected to expand further to between 16.5% and 17.5%. And Non-GAAP EPS will be in a range of $2.90 to $3.00, inclusive of a $0.10 impact attributable to the 53rd week.
Whilst Starbucks is a very well run business and sells a product which some folks just can’t operate without, it faces stiff competition from the likes of Costa Coffee, Dunkin Donuts, MacDonald’s and Tim Hortons. And despite the unceremonious fall of Luckin Coffee in China, there are new competitors which have sprung up thanks to the cheap funding environment. Starbucks is also pricey on a forward earnings multiple of 40x.