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Starbucks Slips on Lower Global Comparable Store Sales

- By James Li

Starbucks Corp. (SBUX), a major global retailer, said global comparable store sales increased 2% in fiscal first-quarter 2018, down 1% from the prior-year quarter.

The Seattle-based company reported record revenues of $6.07 billion for the final three months of 2017. Despite this, revenues underperformed analyst expectations by approximately $0.15 billion.


Company accelerates comp sales growth in China

CEO Kevin Johnson said the "strategic acquisition of East China" allowed the company to accelerate Starbucks' growth in the key China market. Comparable sales in China increased 6% during the quarter, driven by higher transactions and 30% revenue growth.

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Johnson said in the earnings call that Starbucks opened the company's first international roastery in Shanghai for two reasons: the East China acquisition and the belief that someday, Starbucks will operate more stores in China than it will in the U.S. When it opened Dec. 5, the Shanghai roastery became the highest-grossing Starbucks store in the world, with average ticket prices around $29 per customer. Johnson noted the Shanghai roastery had "already exceeded management expectations" in the first month due to extraordinary customer response.

Low holiday sales hurt comparable sales growth in the U.S.

Although the company had strong comp sales growth in China, low comp sales in other markets, especially the U.S., partially offset this growth. Johnson mentioned that U.S. comp sales increased 2% during the quarter, down 1% from the prior-year quarter due to slowdown in transaction comps following the launch of holiday and limited-time offer drinks.

Johnson mentioned the holiday and limited-time offer products "did not resonate with customers as planned," resulting in a 1% decline in transaction comps during the second half of the quarter. The lower holiday sales compressed operating margins in the U.S., which declined 1% from the prior-year quarter.

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The "food-related mix shift" in the Americas contributed to a 1% decline in consolidated operating income, compressing margins by about 1.40% from the prior-year quarter. While the company expects consolidated revenue growth between 9% and 11% for fiscal 2018, Starbucks also said global comp sales are expected to increase just 3% during the year, the low end of the announced range.

Company still offers good growth potential

Starbucks' share price tumbled 4.77% as the company missed its top-line guidance. Despite this, the company still offers good growth potential with a profitability rank of 7 and a GuruFocus business predictability rank of three stars.

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Ken Fisher (Trades, Portfolio) and Jerome Dodson (Trades, Portfolio) increased their positions in Starbucks during the quarter as the company offers good growth potential for 2018.

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Disclosure: No position in Starbucks.

This article first appeared on GuruFocus.