Starbucks Recent Same Store Sales Performance; Implications for Future Growth

 

The Last two years have been tumultuous at Starbucks, the World's largest coffee shop chain.  A "Perfect Storm" of unanticipated challenges has necessitated drastic and often painful actions deemed necessary to resurrect the faltering Company's performance.  In their North American Retail operations, 700 + stores have been shuttered, tens of thousands of Partners (Company Employees) have lost their jobs. And, concurrently the Company's stock price plunged precipitously from the $35/Share range is occupied in early 2007 to the low experienced in late 2008, in the $7/share range.

During this same period, Starbucks’ North American Comparable Store Sales (stores open more than 1 year) declined from historical year’s levels that often exceeded 10%, to the low of <10%> recorded for the first quarter of 2009.

More recently however, rates of decline in Comp Store Sales have improved to the <6%> recorded in 2009 Q-3, ending Aug. 5, 2009.  And the Stock price has risen dramatically to the present $20/share trading range.  While the improvement is most welcome, some analysts have questioned the justification of a $20/share price associated with forward looking EPS estimates that imply Price/Earnings ratio exceeding 20 times earnings----in a Company still experiencing substantially negative growth in Comp Store Sales.

Typically in this industry, Comparable Store Sales performance is considered to be one of several very important and reliable indicators of overall profit and return potential. However, as it relates to Starbucks a cautious and more carefully considered interpretation is in order. One of the confounding issues is that at Starbucks so many important things have changed dramatically and simultaneously. And, this has occurred during a period in which Consumer attitudes and priorities may have also been fundamentally and permanently altered by the influences of the ongoing near meltdown of the economy.  

 

This is the first of a series of 4 articles to be published in this Newsletter prior to Starbucks’ Nov. 5 Q-4 Conference Call.  

 

Five specific factors are likely to have been influential on recent improvements in recent Starbuck’s North American Comparable retail store sales productivity. Each factor  will be examined individually in an attempt to quantify the incremental impact associated with that specific factor. These factors are listed below, and include:

 

 The impact of:

 

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

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

      the second or third year of operation and still 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 resulting from closing many stores that were, prior to
      closure, sharing their trade area with another Starbucks store.
 

The occurrence of these factors and their influence all tend to be one time or transitional in terms of their ongoing effect on Comp Store sales performance. Any residual Comp Store sales growth recently observed and not primarily associated with any of these factors may result from competitive or market changes or influences that are more fundamental and enduring, and may indicate substantive changes in the longer term market performance and sales growth potential of the Company.

Th next installment in this series will address factor 1 (above);  The Impact of Closing about 700 of the least productive North American stores, and will be published Monday,
November 26.

This author consults with leading institutions through GLG