Starbucks Comparable Store Sales. Does .4% YTD Improvement Show Progress?

For the purposes of this analysis, Comparable Stores are those that have been in continuous operation for longer than 13 months. In the retail and restaurant industries, the rate of growth of sales in Comp Stores is generally considered to be an important indicator of the overall company competitive strength and stability, and an indicator of future growth potential.

In recent years, Starbucks’ North American Comparable Store Sales have declined consistently from the FYE 2005 reported 10%, to the low of <10%> recorded for the first quarter of 2009. Very recently, Comp Store Sales for this segment have improved modestly---to the <6%> recorded in 2009 Q-3, ending Aug. 5, 2009. For the purpose of this analysis, we will focus on North American Retail Operations, which were in FY 2008, the latest annual reporting period,  responsible for about 84% of total company revenues.

In the first installment in this series of articles, published Monday, 11/five of the important factors affecting Starbucks'  Comp Store Sales performance, were identified and discussed.

They are:

1. --The Closing about 700 of the least productive North American stores. 

2. –The multi-year compounding of consecutive year-over-year negative growth factors.
3. --The impact of now having many fewer stores in the comp store group that are in

       their second or third year of operation,  and would be growing at above average rates
       due to the sales growth maturity cycle normally associated with most new stores.

4. --Price changes and merchandise category modifications.

5. --Negative cannibalization that should result from closing many stores that were, prior
       to their closure, sharing their trade area with another Starbucks store.

This article will address factors 1 and 5.

Factor 1, Impact of Store Closure Program on Reported Comp Stores Remaining Open

As of the end of Qtr-3 2009 (August 5, 2009), Starbucks reported that they had closed 509 poor performing North American stores of the 800 + slated for closure as part of the ongoing restructuring. 205 of these were closed during FY08.

Starbucks reported that as of the beginning of FY 2009, the Company operated 7,238 stores in the US that produced FY-08 revenues of $6.997. This group included the 650 Stores that had opened during the previous FY-2007, and 1,085 that had opened during FY-2006. The average revenue per store was therefore $966,704.  The Company did not report revenues separately for the 509 stores that had been closed as of the end of Q3-09.


Sufficient detail is not available in the public domain to perform a completely accurate and precise analysis of the impact each of these factors. The objective of this analysis is to describe the directional relationships between Comp Store Sales growth, and each of these factors in the context of the Starbucks circumstances. And, to then demonstrate the range of potential impact by employing reasonable assumptions regarding the Company’s operating characteristics, where the needed information has not been disclosed. 

For the purposes of this analysis, it will be assumed that the average annual individual store revenue for the stores that had been closed by the end of Q3-09,  was  $650,000 or about 2/3 of the overall consolidated US retail Store unit average,  and as having a year-over-year sales decline rate of <-12%>. For any large publicly held limited-service restaurant company, generating an acceptable ROI at this sales level would be highly unlikely. For stores that closed during the first three quarters of FY 2009 or FY 2008, it will also be assumed that they operated on the average for 6 months during FY-09 or 2008, respectively.

As a group, the annual sales volume of the closed stores would therefore be ($650,000*564), or $363.350 Million. The Annual Sales Volume of the Stores continuing to operate would therefore be   ($1,007,841* 6,879), or $6,932,937,500. The sales of the 2 groups combined would be    7,296,287,500.

 The estimated total closed store sales volume of $363.350 Million represents about 5% of the combined sales figure. If the <12%>  assumed rate of annual sales decline for the Closed Store group is weighted by that store-group’s  5% proportion of the total North American Retail Sales, the indicated contribution to the overall rate of decline for the combined group would be: (5% * 12%), or .6%.  Stated another way, to the degree that the assumptions employed in this example are correct, an improvement of .6%,  is assured by closing the 564 worst performing stores, regardless of the level of operational improvement that might be accomplished in the stores that are to remain open. It is an artifact of the accounting process. In this context, the Comp Store Sales improvement of .4% (from <10%> to <6%) reported for Q3 09 as compared to Q1 09, may nor may not reflect a fundamental improvement in the Comp Store performance of the Company.

 

Regarding the issue of negative cannibalization associated with closing a store operating in very close geographic proximity to a store continuing to operate, for the purposes of this example, we will assume that 1/2 the stores that were closed operated within one mile of a continuing store, and transferred 25%, or $163,000 of their pre-closing revenues, to a store (or stores) that will continue to operate. These assumptions are not based upon specific disclosures reported by the Company, but are within the range of specific average levels of potential Sales Recapture benefits that have been mentioned by Starbucks in the press.

On an annualized basis, the closing of all 564 stores would result in a sales reduction of $363.350 million. If in ½ the closed stores, 25% of the lost sales could be recaptured by a nearby store, the total recapture amount would be: ($363.350 * .5 * .25), or $45 million. This amount represents an incremental percentage of about .65% of the 6,879 Continuing Store’s aggregate sales of $6,932,937. Once again, in this context, the .4% reduction in the rate of decline noted in the Q3 09 Comps Store Sales may or may not reflect a meaningful and enduring improvement in the vitality of the business.

 

It is important to observe that the Company has now entered a period where reported aggregate negative Comp Store transactions levels have been annualized twice. The compounding multiplicative effect of 3 consecutive years of negative Comp Store growth in traffic is alarming.

 And, as the Company reported in its FYE 2007 10-K, the only thing that kept the Comp store sales declines from even further deterioration in the second half of 2007, were the two price increases that apparently , at least in the short term, affect the average transaction value. While it is at this point 20-20 hindsight, in that traffic counts were already substantially in decline, and as the Economy was rapidly deteriorating into deep recession, two rounds of price increases during FY 2007 may have resulted in acceleration in the rate of Comp Store Sales decline as it has been experienced during FY 2008 and FY 2009.

  

 

This author consults with leading institutions through GLG