Starbucks reported quarterly revenue that fell short of analysts' expectations, marking the second consecutive quarter of declining same-store sales. The coffee giant faced weaker demand both domestically and internationally. Despite the revenue miss, the company's results were better than investors feared, leading to a more than 5% rise in extended trading.
For its fiscal third quarter, Starbucks reported net income attributable to the company of $1.05 billion, or 93 cents per share, down from $1.14 billion, or 99 cents per share, a year earlier. Excluding items, the company earned 93 cents per share, aligning with analysts' expectations. However, net sales dropped 1% to $9.11 billion, missing the $9.24 billion forecast by analysts.
Same-store sales fell by 3% during the quarter, driven by a 5% decline in transactions. Traffic to U.S. stores fell by 6%, although the domestic same-store sales decline was somewhat offset by an increase in the average ticket price. CEO Laxman Narasimhan attributed the weak performance to a "challenging consumer environment," but noted some positive developments, such as the successful launch of new products like the Summer-Berry Refreshers drinks with boba-inspired pearls.
The company has made several changes to its U.S. operations in an attempt to revive its performance. These include allowing customers to order via its mobile app without joining the rewards program and improving the app's accuracy in predicting order readiness. Former CEO Howard Schultz had highlighted the need to enhance the mobile app experience to win back customers.
Outside of North America, Starbucks faced even steeper declines. Same-store sales slid 7% globally, with a significant 14% drop in China, the company's second-largest market. The decline in China was attributed to reduced transactions and average ticket size, amid increased competition from local coffee shops.
Despite these challenges, Narasimhan remains optimistic about Starbucks' long-term potential. He mentioned that the company is in the "early stages" of exploring strategic partnerships to accelerate growth in China. The nature of these partnerships remains unclear, but they may involve collaborations in technology, real estate, and supply chain.
Starbucks continues to expand its footprint, having opened 526 net new stores in the fiscal quarter. However, the company's performance continues to be scrutinized by activist investors. Hedge fund Elliott Management has accrued a stake in Starbucks, and Narasimhan acknowledged that conversations with Elliott have been constructive.
Looking ahead, Starbucks reaffirmed its previously adjusted outlook for 2024. The company expects global revenue growth in the low single digits, a downgrade from earlier forecasts. Similarly, same-store sales in the U.S. and globally are expected to either decline slightly or remain flat, a reduction from previous growth expectations. China's same-store sales are also projected to decline, down from the initially anticipated growth.
In a complex consumer environment, Starbucks is implementing a three-part action plan to regain its footing as a premium player. This includes attracting more customers throughout the day, launching new items while maintaining a focus on core coffee offerings, and providing more value to consumers.
Despite the revenue miss, Starbucks' shares were buoyed by the reaffirmed guidance, rising nearly 6% in after-hours trading. Analysts remain cautious but see potential in the company's efforts to stabilize and grow its business. David Tarantino, an analyst from Baird, highlighted the impact of "cyclical macro issues" on Starbucks' struggles and anticipates softness in sales for the majority of fiscal 2024 as consumers pull back on discretionary spending.
Bank of America analyst Sara Senatore noted that Starbucks' performance in China is tied to industry-wide challenges. She emphasized that "intense competition is the natural state of restaurant markets" and that strong brands are not insulated from these pressures. Senatore also suggested that franchising could help Starbucks reduce capital expenditure and exposure to volatile macro conditions.
