Starbucks still trying to crack the afternoon daypart code

by Keith Nunes
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Starbucks ham and salami sandwiches
Starbucks Corp. continues investing in its afternoon daypart offerings to improve foot traffic and sales.
 

SEATTLE — Starbucks Corp. continues investing in its afternoon daypart offerings to improve foot traffic and sales. The morning remains strong among both core and non-core customers. Visits to the company’s stores are baked into many people’s morning routine. The afternoon remains another story, and its weakness was a contributing factor in the company’s soft first-quarter results.

On paper, the company’s first-quarter results look strong. Net income for the quarter ended Dec. 31, 2017, spiked to $2,250.2 million, equal to $1.57 per share on the common stock, compared with earnings of $751.8 million, or 51c per share, in the first quarter of the previous year.

Sales for the quarter totaled $4,741.8 million, which compared with $4,469.3 million the previous year.

Tazo Tea, Unilever
Starbucks has completed the sale of the Tazo Tea brand to Unilever.
 

Included in the strong earnings was a 79c net gain related to the acquisition of the East China business. The company also completed the sale of the Tazo Tea brand to Unilever.

Operating income for the quarter fell 1.5% to $1,161.1 million from $1,132.6 million during the same period of the previous fiscal year.

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

“We ended Q1 with 6% revenue growth and 2% comp growth in the U.S.,” said Kevin R. Johnson, chief executive officer and president, Jan. 25 during a conference call with financial analysts. “Continued strength in throughput at peak and strong digital performance were noteworthy highlights in the quarter. But we recognized that overall, our U.S. operating performance fell short of expectation.”

Issues that pressured Starbucks’ results during the quarter included weaker holiday season sales of gift cards and merchandise, and softness in the number of visits by non-Starbucks Rewards customers.

“We continue to reap the benefits of the success of our efforts to increase throughput at peak,” Mr. Johnson said. “Specifically, our highest peak volume stores continued to out-comp the average for our U.S. portfolio overall, with efforts around staffing, technology and lean principles all yielding measurable results. We've now seen three successive quarters of sustained positive comp growth at peak and believe that planned enhancements will continue this trend and are encouraged by our ability to have so quickly rallied our store partners, equipped them with the tools, technology and resources to successfully improve operations.

Starbucks nitro cold brew coffee
Starbucks plans to expand its Nitro Cold Brew program from 1,300 stores to 2,300 stores in the United States.
 

“We will apply the same disciplined approach to improve performance in the afternoon daypart and have identified a number of key operational actions that are underway. We are focused on elevating the Starbucks experience in the afternoon daypart as store partners sharpen operational focus and tune staffing and scheduling, simplification processes and leverage improved routines and lean techniques.”

Some of the initiatives underway to improve afternoon traffic include expanding the new Mercato food menu from two markets to six in fiscal 2018. The company also plans to expand its Nitro Cold Brew program from 1,300 stores to 2,300 stores in the United States.

Starbucks Mercato menu herbed chicken fig spread sandwich
Starbucks' Mercato food menu includes such items as an herbed chicken and fig spread sandwich.
 

“We have seen approximately 1 point of additional comp growth in stores offering Nitro Cold Brew during 2017,” Mr. Johnson said. “Nitro also provides the foundation for a broader platform of draft beverages that expand beyond coffee to include alternative milks and tea-based Nitro-infused beverages.

“Our plant-based beverage platform continues to expand, leveraging almond, coconut and soymilk alternatives. Our refreshment platform, including tea and Starbucks Refreshers, contributed comp growth again this quarter. These beverage platforms also align with our focus on the afternoon occasion.”

A bright spot for the company during the quarter was its business in its China/Asia Pacific business unit. Sales rose 9% during the quarter to $843.7 million, primarily driven by revenues from 1,033 new stores that opened during the past 12 months. Operating income during the quarter rose 20% to $196.8 million, primarily due to sales and favorable foreign currency translation.

Starbucks Refreshers
Starbucks' refreshment platform, including Starbucks Refreshers, helped drive growth during the quarter.
 

“Enabling long-term growth in China is a key priority as it now represents our second largest and consistently our fastest-growing market,” Mr. Johnson said. “The growing relevance and success of our international business, and specifically our business in China, has emerged as a growth driver that is rapidly moving us beyond our long-standing dependence on our U.S. business for needle-moving growth. Today, we have two powerful, independent but complementary engines driving Starbucks' global growth with a long-term opportunity clearly visible in China.” 

Based on its first-quarter results, Starbucks updated its financial and operating targets for the year.

Scott Maw, Starbucks
Scott Maw, c.f.o. and principal accounting officer for Starbucks

“We still expect consolidated revenue growth in the high single digits, excluding approximately 4 points of favorability from the East China acquisition and a roughly 2-point reduction from other streamline activities,” said Scott Harlan Maw, chief financial officer and principal accounting officer. “We also still expect comps to grow 3% to 5% for the year, consistent with our long-term guidance.

“Given the challenges in Q1 and expectations for a somewhat softer Q2, we expect to be near the low end of comp guidance range for the year. Given the margin contraction in the first quarter and likely pressure on Q2, we now anticipate a slight operating margin decrease for both total company and the Americas for the full year before the additional partner and digital investments.” 
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