Starbucks loses customers, lowers forecast

by Monica Watrous
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Starbucks mobile order & pay platform
Starbucks' mobile order-and-pay platform has created operational challenges for the company.

SEATTLE — The success of Starbucks Corp.’s new mobile order-and-pay platform has created operational challenges for the company, leading to fewer transactions in the recent quarter, said Kevin Johnson, president and chief operating officer.

Kevin Johnson, Starbucks
Kevin Johnson, president and c.o.o. of Starbucks

“This congestion resulted in some number of customers who either entered the store or considered visiting a Starbucks store and then did not complete a transaction,” Mr. Johnson said during a Jan. 26 earnings call with financial analysts.

Mr. Johnson, who is set to become the company’s president and chief executive officer in April, said Starbucks is addressing the issue by introducing new in-store procedures and tools and adding new roles and resources to support mobile customers.

Net earnings attributable to Starbucks in the first quarter ended Jan. 1 were $751.8 million, equal to 51c per diluted share on the common stock, up more than 9% from $687.6 million, or 46c, in the prior-year period. Total net revenues rose nearly 7% to $5,732.9 million from $5,373.5 million.

Starbucks gluten-free breakfast sandwich
Starbucks plans to launch a gluten-free breakfast sandwich this year.

Global comparable store sales increased 3%, reflecting a 3% increase in the Americas, a 5% increase in China/Asia Pacific, and a 1% decrease in Europe, Middle East and Africa. In the United States, a 5% increase in average ticket, driven by strong food and beverage sales, was offset by a 2% decrease in transactions.

“Our Americas segment had a solid quarter, posting 3% comp growth with 3% comp in the U.S. and 7% revenue growth,” Mr. Johnson said. “Americas added about 250 net new stores in the quarter and now operates almost 16,000 stores.

“When analyzing the 3% comp growth in the U.S., there are four major points to capture both the strength of the brand and the opportunities to further accelerate comp store growth.”

Starbucks Teavana shaken iced teas
Beverage sales increased behind double-digit growth of such offerings as shaken Teavana iced teas.

First, he noted, total beverage sales increased 7% behind double-digit growth of iced espresso, iced coffee and shaken Teavana iced teas.

“Second, our food sales were also strong, growing 8% year-on-year, contributing 1 point of comp driven mainly by improved attach across all day parts with continued strength in the morning,” Mr. Johnson said. “Food represents 20% of our total sales with breakfast sandwich revenues growing 16%, bringing the two-year growth rate to 69%. Sales of premium breakfast sandwiches increased 52%.”

In addition to food and beverage category performance, Starbucks benefited from a surge in gift card sales and reloads, and a significant increase in Starbucks Rewards members.

Starbucks Nitro Cold Brew
Starbucks is building a broader beverage platform around its Nitro cold brew.

Still, comparable performance came in under expectations, sending shares down more than 3% in mid-morning trading on Jan. 27 from a Jan. 26 close of $58.46.

Plans are under way to drive mid-single-digit comparable sales growth for the full year, including product innovation.

“First, product innovation,” Mr. Johnson said. “In beverage, we are building a broader beverage platform around Nitro and other cold brew offerings complemented by innovation around Frappuccino and Teavana iced teas.

Starbucks Sous Vide Egg Bites
Starbucks is expanding production capacity to meet incremental demand for its new sous vide egg bites.

“Regarding food innovation, we introduced delicious, healthy, high-protein sous vide egg bites this month that had been extremely well-received and are driving both incremental revenue and increased attach. We are expanding production capacity to meet incremental demand for these egg bites. We are also launching the highly anticipated gluten-free breakfast sandwich soon.”

For the full year, the company now expects consolidated revenue growth of 8% to 10%, down from a prior guidance of double-digit growth.
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