Starbucks‘ (NASDAQ:SBUX) latest earnings report contained encouraging signs of a rebound, even though a profit recovery may take longer than investors had hoped. That was the main takeaway from the coffee giant’s holiday quarter results from late January.
In a subsequent conference call with Wall Street analysts, CEO Kevin Johnson and his team broke down the latest results and explained why they’re still optimistic about a sharp growth spike building over the next few quarters as the pandemic threat ends.
Let’s look at some highlights from that presentation.
The bigger picture
“Our business in China recovered in Q1, in line with our expectations and we remain on track to achieve full sales recovery of our U.S. business by the end of Q2.” — Johnson
It was exactly a year ago that Starbucks announced the temporary closure of most of its stores in China, marking the beginning of an unprecedented global retailing pause. After slumping by more than 50%, the Chinese market returned to growth this quarter.
The U.S. division took a big step in that direction, too, with comparable store sales dropping 5% compared to 9% in the September quarter .
Management credited popular food and beverage releases like Peppermint Mocha with helping support that uptick. The drive-thru business, which accounted for more than half of U.S. sales, was also critical during a time when many states were enforcing seating and capacity restrictions. “We are very pleased with our start to fiscal 2021,” CFO Patrick Grismer said.
Profit rebound by Q4
“Our strong start to the year…provides optimism that we have the potential to exceed our full year non-GAAP EPS guidance.” — Grismer
Starbucks was careful to stress that lots of risks remain to the short-term earnings outlook, including COVID-19 outbreaks that are now affecting key parts of China and the U.S. That uncertainty convinced them to simply affirm their 2021 guidance for now while promising a more detailed update following the second quarter report in a few months.
In the meantime, Starbucks’ earnings recovery is moving along the broad path that executives outlined last year, with sales likely to begin growing again in the U.S. starting in the current quarter while the profit rebound follows roughly six months later.
Operating margin is now sitting at 15.5% globally, down from 18.2% a year ago. That slump was driven by the falling sales base, combined with increased costs in areas like labor and COVID-19 safety.
The great reconnection
“As we lap material adverse COVID-19 impacts in the month of March, we expect U.S. comparable store sales growth of approximately 5% to 10% for the second quarter.” – Grismer
Starbucks revealed some encouraging demand trends covering the last few weeks. Comps are on pace to fall just 2% in the U.S. in January compared to an 8% drop in December. China, the chain’s other main growth engine, should see a 7% drop in January due to new mobility restrictions related to COVID-19 outbreaks.
Comparisons get much easier from there, with Chinese comps set to roughly double beginning in the month of February even as the U.S. makes its first push into positive territory in a year. Looking further out, the company is hoping to play a big role in the return to in-person socializing in 2021 as widespread vaccinations take hold.
That global end of social distancing would come just as the coffee giant celebrates its 50th year as a company that prides itself on being a gathering place. “We are here for that great human reconnection,” Johnson said. “Starbucks was built for this moment.”
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