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Why Starbucks’s 1Q16 Revenue Missed Estimates

Good News and Warm Brews: Starbucks's 1Q16 Margins Expand

(Continued from Prior Part)

Starbucks’s key segments

Starbucks (SBUX) operates restaurants in 65 countries around the world. However, ~82% (as of 1Q16) of its revenue comes from the Americas and China/Asia-Pacific segments. The main countries in the Americas segment are the United States, Mexico, and Canada. The main countries in the CAP segment are China, Japan, South Korea, and Taiwan.

Revenue growth decelerates

For 1Q16, Starbucks reported overall revenue of $5,373 million, which grew 11.9% compared to $4,803 million in 1Q15. The company’s 1Q16 revenue growth fell short of analysts’ estimates of $5,390 million, which would translate into growth of 12.2%.

An alternative way to access Starbucks is through the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY invests about 4% of its portfolio in Starbucks. It also has holdings in other restaurants, such as McDonald’s (MCD), Darden (DRI), and Chipotle Mexican Grill (CMG).

Segment results

The first-quarter results are generally the strongest for Starbucks. They include end-of-year holiday sales.

The Americas segment recorded sales of $3.7 billion—10.7% year-over-year growth. This is 0.7% higher than the 10% growth in 1Q15.

The CAP segment’s revenue grew to $653 million—32% growth compared to the 86% growth in 1Q15. This might seem like a steep drop, but bear in mind that 1Q15 included Japan segment sales. As the effect of the company’s Japan acquisition rolls over, we should see growth normalize. Historically—for the last three years, excluding Japan—the CAP segment had an average revenue growth of 26% year-over-year.

The EMEA—Europe, the Middle East, and Africa—segment’s revenue grew 54% to $512 million. The Channel Development segment’s revenue fell 29% to $313 million during the quarter. This fall is likely why the company missed estimates.

Next, we’ll look at what affected revenue growth in detail.

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