MOST RECENT CONFERENCE CALL TRANSCRIPT
MOST RECENT CONFERENCE CALL TRANSCRIPT
THE WEEK THAT WAS, ENDING 5/6, LOT’S OF EARNINGS REPORTS, SEVERAL RATINGS CHANGES, MANY MORE DATA POINTS IN THE WEEK TO COME – links to transcripts provided
Starbucks reports, only change is David Palmer upgrading. Nobody wants to be negative. NICOLE REAGAN, JOHN GLASS, CHRIS CARRIL and JON TOWER stay neutral. LAUREN SILBERMAN, JEFFREY BERNSTEIN, DAVID PALMER and ANDREW CHARLES continue to like it.
Denny’s reports, NICK SETYAN still likes it.
Restaurant Brands reports, only change is CHRIS O’CULL downgrading to HOLD. M.Stanley analyst maintains underweight. JON TOWER is neutral, while CHRIS CARRIL AND LAUREN SILBERMAN like it here.
Yum Brands reports. No changes. LAUREN SILBERMAN is NEUTRAL while JON TOWER says BUY.
Brinker reports (and disappoints). DAVID PALMER downgrades to IN-LINE. BRIAN MULLAN, NICK SETYAN, and M.STANLEY analyst are NEUTRAL. BRIAN VACCARO and ERIC GONZALES continue to be positive.
Wingstop reports (and disappoints). M. Stanley analyst, NICK SETYAN, JON TOWER and ANDREW CHARLES all stick with it.
SHAKE SHACK reports. Everybody maintains. LAUREN SILBERMAN and BRIAN MULLEN are neutral, while PETER SALEH & NICK SETYAN like it.
PAPA JOHN’s reports. LAUREN SILBERMAN and NICK SETYAN continue to like it while BRIAN MULLAN is neutral.
THE WEEK TO COME: MORE DATA POINTS
5-09 After Market Close RCI Hospitality Holdings RICK
5-10 Before Market Open First Watch Restaurant Gr FWRG
5-11 Before Market Open Wendy’s WEN
5-11 Before Market Open Krispy Kreme DNUT
5-11 After Market Close Dutch Bros BROS
5-12 Before Market Open Carrols Restaurant Group TAST
STARBUCKS REORGANIZES AS SCHULTZ RETURNS, BRINKER AND WINGSTOP DISAPPOINT THIS MORNING, THE FOLLOWING ANECDOTAL REPORT ILLUSTRATES THE CHALLENGE!
We wrote our “Hope” anecdote a couple of days ago, to be published as part of our monthly column the 5/15 issue of the Restaurant Finance Monitor. However, in the wake of (1) Howard Schultz’ temporary return to Starbucks, his decision to withdraw guidance for ’22 and invest one billion dollars “to uplift Starbucks’ employees and The Store Experience and (2) the disappointing results reported this morning at Brinker and Wingstop, the following field trip observations are worth thinking about today. There will be conference calls today at 10am for EAT and WING. From an investment standpoint, we have always valued the “transparency” of this industry.
Hope is not a strategy – “Culture”, or “hospitality quotient” as Danny Meyer has put it, seems difficult to define but is recognizable when you experience it.
As a positive example: I visited a First Watch restaurant last week for the first time, around 9:00 am on a Monday morning. As I noticed that the entrance door and adjacent window glass were sparkling clean (the first tell), a young woman with a big smile opened the door and ushered us in. We sadly didn’t see any more of her but the entire service team was equally friendly, made easy eye contact, tried to be helpful (without being intrusive), obviously happy to be there. The menu was appealing and well priced, the coffee included flavored creamers and we both enjoyed the blueberry pancakes. More important than the food, because you can get coffee and pancakes in lots of places, was the dining experience. I came back to NYC and bought the stock (FWRG, trading at about 12x trailing EBITDA).
On the other hand: That same night, we had dinner at a publicly held full-service restaurant chain. There were tables available but we waited for twelve minutes to be seated, so our assumption was that they were short of staff. We were handed menus, a bit worn, as we were seated but it was six or seven minutes before a server showed up to take our drink orders. The appetizer arrived in an acceptable amount of time but the entrees took way too long. As we waited, there seemed to be quite a few service people in the area but it felt like they were a bit confused. The activity was not frenzied but it seemed less than organized or purposeful. After waiting too long for our entrees, and finally making eye contact with our waitress, I said: “So I guess our entrees will be here soon?” Her response: “I hope so”, as she disappeared from view, is as much as we need to know. My basic reaction was one of sympathy, since this girl’s orientation had obviously been far from adequate in today’s labor environment. It must be a daunting challenge to hire, train and motivate the rapidly turning over service staff in a high volume full service restaurant. On top of that, the kitchen staff may not do their part, and the service person who just happens to be on the firing line will get discouraged pretty quickly.
If restaurant management is throwing service personnel out on the floor, to interface with customers (who are increasingly hard to come by these days), “hoping” for a good outcome, there’s some serious work to be done.
P.S. Four and one half years ago, we wrote about Starbucks as follows:
IT’S A ‘BUM RAP”, STARBUCKS DOES NOT SELL “$5.00 CUPS OF COFFEE”
It’s a “bum rap”. The media, and the skeptics like to point to the folly of customers paying $5.00 for a cup of coffee. However, we priced (before tax) Starbucks, Dunkin’, and Horton’s in Detroit (to avoid NYC prices) this morning. Starbucks’ 12 oz.“tall” coffee is $2.20, Dunkin Donuts 10 oz. “small” is $1.75, and Horton’s 10 oz. “small” is $1.58. Per oz., Starbucks costs $.183, Dunkin’ is $.175 and Horton’s is $.158. If you want a latte’, the gap is wider ($.312 per oz. at Starbucks, $.253 at Dunkin’, and a materially cheaper $.222 at Horton’s). A latte’ costs more at Starbucks, but Dunkin’ and Horton’s don’t even offer the Soy Latte’ that I order. I can’t vouch for the “quality” of latte’ at Dunkin’ or Horton’s. You can judge for yourself whether the service component, or the type of coffee, is worth the price premium at SBUX but, in any event, it is not a “$5.00 cup of coffee”, and Starbucks’ prices are not grossly higher than the competition.
THE STARBUCKS DIFFERENCE
In my opinion, what has distinguished Starbucks over the years has been the corporate “culture”, which they have incredibly duplicated in 27,000 stores worldwide. Their employees, selected, trained, and motivated to an unmatched degree in food service, look you in the eye, remember your name and drink if you are anything close to a regular customer, and become part of your daily social life. A couple of years ago, about the time that Chipotle ran into trouble, I asked a SBUX employee if he knew anything about Chipotle. This young man, perhaps 18 or 19 years old, told me he used to work at Chipotle, then gestured kind of frenetically with his hands saying: “at Chipotle it was all about speed. Starbucks makes me a better person”. That’s what Starbucks has been all about, creating a uniquely welcoming retail environment that produces “better persons” of their employees.
THE TIMES THEY ARE A’CHANGIN’
BARRON’S MAGAZINE this morning has a front cover entitled THE FUTURE OF COFFEE (AND RETAIL). The subtitle reads “Starbucks has succeeded where Silicon Valley hasn’t: changing the way consumers pay. The behavioral shift holds big promise for the coffee giant and its stock”.
Not exactly, in my opinion. It is not just about “the law of large numbers”, and the difficulty of satisfying investors by building on profit margins that are well above peers. The business model has changed, and the question becomes whether the new model will match the original. It’s well known that a new loyalty program bothered some customers and also that an increasing number of customers are ordering and paying online, often in advance of entering the store. In the most recent quarter, 30% of US transactions were paid using the smartphone app, up from 25% a year earlier and 20% two years ago. More important, to my view, is that 9% of US orders were ordered and paid for in advance. The company has been discussing the store level congestion for several quarters now, as mobile orders slow down service for customers going through the line. Perhaps it’s just me, but I am put off somewhat when the line at the register (where I like the human contact) is short, but I have to wait while eight or ten orders are pumped out ahead of my own.
MILLENIALS, WHO ARE THE SPENDERS, DON’T VALUE HUMAN CONTACT (AS MUCH)
It’s not so long ago that pundits dismissed the internet as a retail venue. The public was not expected to give out their credit card information, and certainly was not going to buy “touchy, feely” products like apparel or shoes through online channels. The public is not only ordering “everything” through Amazon and others, but relationships are maintained through Facebook and other social channels. As a corollary, customers are increasingly seeking “experiential” retail situations, rather than visit the malls, with their undifferentiated stores and restaurants, most often staffed with poorly trained employees.
WHAT’S IT ALL MEAN TO EMPLOYEES, AND CUSTOMERS?
Relative to Starbucks, their leadership with mobile order and pay, increasingly in advance of the store visit, may well be appropriate and necessary, but the business model has changed. It’s become a production challenge, not a relationship driven enterprise. The employed “people person” who was the star of the previous model, is not going to be as easily satisfied, because most of the employees, for most of their time, are busy pumping out product. It’s going to be harder to find someone as described above who says that Starbucks “is making me a better person”. From the customer side, there are 27,000 stores already existing that are already tightly configured and can’t be reconfigured too much to handle a lot more production. From a customer standpoint, some, like myself (perhaps in the minority these days), who value the human contact, may decide that the local independent shop, or even the home or office kitchen, can provide an adequate cup of coffee at a competitive price without the “tumult”.
I remember when Howard Schultz said that food will never be a material part of Starbucks’ sales. Today, it represents 30% of revenues. Schultz originally envisioned his coffee shops as a “third place”, to hang out other than home or office. That’s a little hard today, in a small busy shop, but we can call this an “unintended consequence” of building one of the still growing premier worldwide brands. Comps and traffic have slowed in recent years, due to the “law of large numbers”, the natural limitations of small stores that were not originally built to handle today’s volumes, and the evolving environment that every successful retailer must adjust to. Starbucks is one of the most successful retailers ever created, and we don’t doubt that they will continue to succeed in a major way. We caution however, that the rate of progress demonstrated in the past, already slowing, will be increasingly difficult to replicate. The business model has evolved. Starbucks was a retail “disrupter” but their previous approach may not be quite as successful. Accordingly, valuation parameters that have applied to SBUX equity in the past may not apply in the future. The stock chart that has languished over the last couple of years may well be reflecting the most likely future business model; still good, just not quite as great.
FIVE UPDATED WRITEUPS, – KURA SUSHI (KRUS), ROCKY MOUNTAIN CHOCOLATE FACTORY (RMCF), McDONALD’S (MCD), STARBUCKS (SBUX) AND BRINKER ((EAT)
The links below take you to the updated corporate descriptions, which includes a link to the transcript of the most recent conference call.
Kura Sushi (KURA)
Rocky Mountain Chocolate Factory (RMCF)
STARBUCKS (SBUX) REPORTS DECEMBER QUARTER – A LOT YOU SHOULD KNOW!
Starbucks reported last evening results for their 1st (December) quarter, disappointing enough, especially in terms of guidance, that the stock sold off 5% in the aftermarket trading.
We’ve updated our concise Corporate Description, and that link is provided below. For those interested in all the details we have also provided a link to the transcript of their Conference Call last evening. Here and now we want our readers to be aware of their commentary regarding cost pressures, inflationary expectations, staff compensation requirements and pricing plans.
The single most dramatic statement, affecting every operator and investor in service industries is that Starbucks expects, by September of this year (their fourth quarter) to be providing AN AVERAGE STORE HOURLY WAGE OF SEVENTEEN DOLLARS. Competitors for retail crew will obviously have to compete with that, and Starbucks has long additionally provided excellent fringe benefits within an outstanding operational culture.
The Omicron variant resulted in higher than anticipated costs in the December quarter, both in terms of store staffing (hiring, training and retention) and supply chain distortions. While some of this has abated during January, the expectation is that these elements will continue to be a factor in the balance of ’22. These costs are expected to affect operating margins by about 200 basis points, part of which will be recouped by pricing actions and operating efficiencies. SBUX management commentary is no doubt typical of many product and service providers, who were hopeful that the obvious inflation would prove to be “transitory”, held back on price adjustments, but no longer. “Overall our inflationary pressures in FY2022 will remain elevated relative to FY2021”.
An interesting side note is that Starbucks, through a Partnership with Pepsico, is entering the energy category with Starbucks BAYA energy drink, no doubt looking over their shoulder at Dutch Bros (BROS).
Our readers can fill in the details from the public releases and the Conference Call transcript link provided below. There is no reason to write off this still great company, but 2022 will be a lost year in terms of earnings progress and that could prove to be typical of many other service companies.
CONFERENCE CALL TRANSCRIPT
UPDATED CORPORATE DESCRIPTIONS – Arcos Dorados, Flanigan’s, Noodles, Rocky Mountain Chocolate Factory, Red Robin Gourmet Burgers, Starbucks
UPDATED CORPORATE DESCRIPTIONS – SHORTLY WILL INCLUDE VIRTUALLY EVERY PUBLICLY HELD RESTAURANT COMPANY – to be updated each quarter
The summaries we show, while not complete in detail and involve a number of approximations, provide a good starting point for our own investment banking activities and will hopefully do the same for our readers.
THE HOSPITALITY QUOTIENT – WE CAN CHANGE THE WORLD, AT NO COST!
“Culture” is an overworked term in the restaurant/hospitality business. Every operator strives to create an exemplary corporate culture. Hard as it is to define, Danny Meyer and Howard Schultz have demonstrated how far a great culture can take you. It is not the coffee, good as it is, that has allowed Starbucks to build 20,000 profitable stores worldwide. My daily visit to Starbucks is my morning social life. “Hi Roger, your usual venti soy latte’, no foam?”, or ”did you get a haircut?”, or “haven’t seen you in a little while, been away?”
My wife and daughter think I’m getting a little (or a lot) eccentric. Often, after a service person responds with a “no problem” after I thank them, I take a minute (if they seem friendly) to suggest that something like “my pleasure” is a lot more hospitable or what I might call charming. Of course it’s not a problem, because it’s their job, after all. I feel like I’m doing them a favor, mentoring them if you like, and it costs me nothing. I say it with a smile, tell them I am only taking the time because they seem like they care. Almost all the time they seem to appreciate it, and usually respond, on my next visit, with “my pleasure” and a smile. I tell my wife and daughter that they can call me a little crazy, if they like.
Which leads me to my visit this morning to Starbucks. The expeditor at the pickup counter, who Starbucks now has in place to sort out the digital/pickup orders from the in-store ordering, handed me my drink, and I thanked him. He said “my pleasure”. I complimented on that response, and he said that it was natural for him because he also works at Chick Fil A.
I’ve never met or spoken to the management of Chick Fil A but I have visited their stores and the experience is always a good one. Last I read they were doing $5M a copy in a six day week. That compares pretty well to McDonald’s, good as they are these days, doing 40% less than that over seven days. Maybe there really is something about a great corporate culture, taking the time to build something as simple as a warm salutation into the training process.
LET’S CHANGE THE WORLD TOGETHER ! There’s nothing obnoxious about “no problem”. However, we would be doing our employees, many of whom are just beginning their working lives, a great long term service if we suggest a variety of more personal, hospitable, even charming responses. “My Pleasure”, “Always Nice to See You”, “You’re Very Welcome”, “Any Time”, “Come See US Again”, or down south “Y’all Come See Us Again, Y’Hear?” are just a few suggestions.
There’s a reason that the customer experience at Chick Fil A and Starbucks is a cut above almost all of the competition, and the sales follow. The above does not happen by accident.
STARBUCKS (SBUX) – UPDATED WRITEUP – INEXPENSIVE RELATIVE TO ALMOST EVERYTHING ELSE!
Starbucks continues to be the premier roaster, marketer and retailer of specialty coffee in the world. The company operates in 83 markets, up from 81 a year ago. Historically, the sales mix has been 74-75% beverages, 20% food, 4% ready-to-drink beverages (classified as Channel Development income and includes royalties from Nestle under the Global Coffee Alliance) and 1% packaged and single-served coffees and teas.
As of the end of last year, the company operates and licenses approximately 32,500 stores globally. The company operates 10,109 stores and has licensed another 8,245 in the Americas segment (North and South America). Internationally, the company operates 6,461 (4,700 in China) and licenses another 7,779 (Korea leads with 1,468 stores). Over the next 18 months, the company plans to close upwards of 800 stores, so net store growth in the coming year will be lower than prior years.
Not surprisingly, the company’s sales and operating profits continue to be dominated by the Americas segment. The spike in operating income attributed to the Channel Development segment in FY20 was due to large declines in the profitability of the other two segments and not an increase in margins. As trends normalize in FY21, the operating income contribution from this segment will revert back to its historical percentage (but is still growing).
Since our last update, Starbucks has issued FY21 guidance as well as hosted its Biennial Investor Day, which provided long-term guidance through FY24. In this update we will look at the recent guidance and discuss changes in customer behavior in the context of this guidance.
Summary of Fiscal 2021 Guidance
At Biennial Day, the company included this slide to illustrate how the trend towards more pickup and to-go orders will impact the store base. While the number of stores in Midtown Manhattan is expected to remain flat, there is a significant change in the mix to smaller pickup stores. These stores will be less expensive to staff and operate and still generated significant sales, which will increase the company’s long-term return on investment.
These changing trends, if sustainable, could help support the company’s long-term guidance of 4-5% comparable sales growth. Historically, transactions have been relatively and changes in the average ticket have been mostly driven by modest price increases. If the current trends in consumer behavior continue, it should be easier for the company to drive both frequency of visits and higher ticket prices with more food being purchased per order. This will also help leverage labor and operating costs.
THE BUSINESS MODEL IS CHANGING
Starbucks long-term success is more than just the result of selling an addictive product. It created a culture where customers and baristas interacted with each other on a personal level and customers lingered in the stores for hours. These relationships and the in-store experience is one of Starbucks’ greatest competitive advantages. It is possible that the combination of an increase in drive-thru/pickup, smaller stores and increased digital marketing could hurt brand long term by affecting the relationship between customer and employee.
On the other hand, the higher utilization of the digital app can lower marketing costs and improve the “personalization” of the products, satisfying customers more from that standpoint. A customer’s relationship with the barista may not be what it was, but “the times they are ‘a changin’ and this may be the best approach, all things considered.
What other restaurant company would you rather put away for the next five to ten years, with confidence that earnings and dividends are likely to grow faster than the general economy. The growth as described above will be provided by a combination of (1) reopening of stores and normalization of routines (2) transformation of the asset base (3) accelerating digital momentum (4) easing competitive dynamics, notably in China (5) franchising or licensing of company stores outside of US (6) continued progress with industry leading Rewards program (7) modest exposure to nationwide $15 minimum wage.
In spite of the pandemic SBUX raised its dividend in 2020 by almost 10%, management has stated that it will pay out 50% of earnings in dividends going forward, and all indications are that this kind of growth can be sustained. A good case can be made that Starbucks equity is a better investment, currently yielding 1.7% and likely to grow over time, than US Treasuries, where you get a fixed 1.4% over ten years but no chance to grow your principal. If SBUX can reach its long-term goal of 10-12% EPS growth, then the dividend should grow at that rate as well and provide investors with an 11-13% annual total return. By our estimate, SBUX could be paying $2.35 per share by fiscal ’23, yielding about 2.3% on today’s purchase. The 10 year US Treasury (today yielding 1.4%) wouldn’t be yielding 2.3% unless the principal was down by about 45%, and there is a good chance SBUX equity could be up in price at that point. That’s a double barreled possible win for SBUX.
For the growth stock jockeys among our readers, Starbucks equity is selling now at the high end of its historical range, relative to EPS and EBITDA. However, we contend that many other restaurant companies, far less attractive than SBUX in terms of predictable growth and strong balance sheets are selling even more above their respective ranges. We don’t provide relative ratings for restaurant names, and we would rather not single out the least attractive situations. Let’s just say that: other than a few premier companies such as Darden and McDonald’s, adding in perhaps Cheesecake Factory and Texas Roadhouse, there are very few companies that represent comparable value to Starbucks.
MONTHLY COFFEE PROGRAMS – WHO WINS, WHO LOSES ?
I really like Starbucks. It’s my social life in the morning. Everyone in the store knows my name (Roger that!) and my drink (a grande’ soy latte’, no foam, costs $6.04 in Manhattan, including tax). It therefore costs me $2200 annually of after tax money, so it costs well over $3,000 per year, pretax, for my morning coffee experience.
On the other hand………..
As you may have heard, Panera is now offering a monthly coffee program, whereby I can get unlimited coffee for the month for $8.99, any size, any flavor. (no soy for that price, admittedly)
Burger King has been offering, since last March, a monthly coffee subscription for $5.00 per month.
McDonald’s has been offering any size coffee for $0.99. You can also get two breakfast sandwiches for $4.00, so two people can have a McMuffin and cup of coffee for $6.00 plus tax.
Wendy’s is aggressively rolling out a new breakfast program, starting today. They have been promoting “two for $4” sandwich deals for some time, so we can expect the breakfast offerings to be similar. They are planning to spend $40-50M on advertising of the introduction so we can assume they will be aggressively pricing the coffee.
Dunkin’ Brands, with an extensive selection of donuts and other pastries, sells their coffee at $2.00 a cup, more or less, a little less for a “regular”, a little more for “large”.
All these companies are clearly hoping that the customer will buy something else besides the coffee, as long as they are at the store. However, without question, the pricing environment for our morning cup of coffee is getting more competitive..
Away from the publicly traded companies, perhaps Panera, with their established reputation for the quality of their breakfast offerings, combined with their “community gathering place” comfort (pioneered by Starbucks) will see the largest incremental positive effect of their new breakfast program. The publicly held companies will be fighting each other for market share, since nobody has a “moat”.
Relative to Starbucks: This can’t be a plus. Will it cripple them? Certainly not, but we suggest that the comps will slow rather than accelerate. If only one out of twenty customers makes a switch, it will be noticeable, and there is likely to be at least one of their competitors fairly nearby. They could sell more food but that’s already been the strongest part of their comp growth the last ten years. Their competitors sell food as well, and Starbucks doesn’t have a material edge in that regard. Stocks sell, by the way, based on the “second derivative”, the change of pace of the growth rate, still growing but how fast?
If there were a Panera or McDonald’s between “my Starbucks” and my office, I would be sorely tempted to adjust, even if I have to make new friends. I could afford to spend another day or two on the golf course 😊
CONCLUSION: Starbucks has written the book on service and hospitality in the QSR space, creating a worldwide brand (now 32,000 stores !) in the process, admirable on many levels. There is no reason we know of that the extraordinary performance will not continue to be the case. From the standpoint of investing in SBUX, the P/E of 28.8x expected earnings in the current year, and over 20x TTM EBITDA, now growing at 8-10% annually, seems to adequately value the equity in the next year or two. Longer term, if valuations in the general market hold up, SBUX, the stock, should do fine as it grows materially faster than the worldwide economy as a whole.
THE COMPANY: Starbucks began in 1985 and today is considered the premier roaster, marketer and retailer of specialty coffee in the world. Currently, Starbucks operates in 81 markets around the world. Besides coffee, Starbucks sells a variety of teas and other beverages as well as a variety of high-quality food items. In recent years about 20% of company operated locations has been food. Starbucks also sells their products through other channels such as licensed stores, grocery stores and other food service outlets through their global coffee alliance with Nestle’s S.A.
Starbucks has three operating segments: (A) the Americas which is inclusive of the U.S., Canada and Latin America, (B) International which is inclusive of China, Japan, Asia Pacific, Europe, Middle East and Africa, and (C) Channel Development. Revenue as a percentage of total net revenues for fiscal 2019 were as follows: Americas 69%, International 23% and Channel Development 8%.
DEVELOPMENT COMMENTARY: Total global store count increased 1,932 locations or 6.6% over fiscal year 2018. The greatest increase in company stores came from International markets, China in particular with 602 net new stores (629 opened and 27 closed) bringing the total there to 3,521. The Americas increased store count between 2018 and 2019 by 2.9% to 9,974. Licensed stores increased by 10.3%, with growth most notable in Korea, which added 103 net units to a total of 1,334, U.K adding 54 to total 707, Turkey adding 41 to 494, Indonesia adding 56 to 421 total, Philippines adding 37 to 397 total, and Thailand transferring 377 from the company to 392 total licensed at year end.
UNIT LEVEL ECONOMICS:
UNIT LEVEL ECONOMICS COMMENTARY: While we can calculate that the AUV, worldwide, for company operated locations is slightly under $1.4M, and the stores are very profitable to be sure, it is difficult to be precise about store level economics. Unit level results vary between markets that are spread worldwide, and licensing income and expenses come into play as the company reports by geographical segment. As a guide however, and using The Americas as the best indication, we provide the table above. Note that Cost of Goods include equipment and product sales to licensees so we calculate all expense lines against total net revenues which include license fees. With that in mind, CGS decreased in fiscal 2019 over fiscal 2018 by 90 basis point. Store Operating Expenses (including Labor and Benefit costs) increased by 110 basis points primarily driven by investments in the Labor content. On this basis, Approximate Store Level EBITDA was virtually flat at 26.6% of Total Net Revenues. It’s good to sell an addictive product 😊
SAME STORE SALES:
SAME STORE SALES COMMENTARY: 2019 global same store sales, as indicated above, increased by 5% in fiscal 2019 driven by 3% increase in average ticket and a 2% increase in comparable traffic. In ’19, SSS was 5% in the Americas (including 2% transaction growth), 3% International (1% transactions).
RECENT DEVELOPMENTS: (Per the year end earnings release and conference call) Noteworthy developments in the year ending 9/30/19, in addition to corporate growth in units and sales cited above, include: Active Starbucks’ Rewards membership in the US up 15% to 17.6M, returning $12B to shareholders in the form of dividends and share buybacks, benefit from the licensing of their CPG and foodservice to Nestle that was closed in late Aug.’18. Operating income in the Americas was up 5% YTY, 70 bp less than the prior year, with a 9% increase in revenues.This decreased operating margin was due to the Starbucks Leadership Experience, providing higher wages, benefits and labor hours, which was partially offset by cost savings initiatives and sales leverage. Internationally, Operating Income was up 18%, up 180 bp on a 6% increase in revenues. It was driven by 11% store growth, as well as cost savings and the conversion of certain retail business to licensed markets, partially offset by higher wages and an unfavorable product mix shift.
Fiscal 2020 guidance included global comp sales growth of 3-4%, about 2,000 new stores globally (1400 international plus 600 in the Americas), consolidated GAAP revenue growth of 6-8%, consolidated operating income growth of 8-10% (with obviously higher operating margin), an effective tax rate of 22-24%, GAAP EPS from $2.84-$.2.89 (non-GAAP from $3.00-$3.05), capex of about $1.8B. Interesting (to us, anyway) that Bloomberg, as shown in the template above, carries the non-GAAP estimate. Whatever happened to Generally Accepted Accounting Principles?
On the conference call: Management pointed out that the fourth quarter comp of 6% in the US included transaction growth of 3% and a two year comp of 10%. China, also, had a very strong Q4, with a 5% comp including transaction growth of 2% (which this year reversed previous slightly negative transaction counts) and a two year comp of 6%. Cold beverages are helping, with Nitro Cold Brew introduced in the US last summer and The Pumpkin Cream Cold Brew this past fall. The Reward Program now has over 10 million active members in China (up 45% YTY), on top of the 18M in the US, where the program is generating 42% of store revenues. Also in China, Starbucks is now delivering to over 3,000 stores, mobile orders amounted to 10% of sales with 7 points from Delivery (only 1% of sales in the US) and 3 points from pickup. In China also, perhaps driven by the competitive efforts of Luckin Coffee, a new Voice Ordering and Delivery by a “Tmall Genie” was introduced to enhance the mobile experience. Management also made the point that the Global Coffee Alliance, with Nestle, was EPS accretive in ’19, faster than originally expected. Overall, CEO, Kevin Johnson, summarized the strength of the Starbucks brand well. “Growth at Scale has really enabled us to ..differentiate Starbucks…the focus that we’ve put on the customer experience…the beverage innovation…..the digital customer relationships..executed with a discipline that has driven our customer connection scores to an all time high.” We have only touched on a small portion of the various operating initiatives taking place at this premier worldwide brand. Those of our readers that are interested can access the full conference call transcript at www.starbucks.com.
CONCLUSION: Provided at the beginning of this article