Analysis: SBUX

Starbucks (SBUX) reported after the close on Thursday with an in-line with expectation quarter despite missing on revenues. For the quarter, Starbucks reported revenue of $5.7 billion, slightly missing consensus of $5.75 billion, while EPS was reported at $0.55, matching the consensus. Leading into the report, shares of Starbucks traded 2.69% higher for the day, and despite the matched earnings, the initial reaction has been volatile in after-hours trading, moving lower and erasing its gains. This is most likely due to the watchful tone and updated guidance for next quarter, as CFO Scott Maw said, "...the combinations of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors has us a bit more cautious going into Q4." The updated guidance (more later) really was a disappointment for the company as they lowered their expectations moving forward.

Before getting into the numbers, on its press release Starbucks announced what strategic actions it will be implementing to "optimize its store portfolio, strengthen its core, accelerate execution against its long-term growth strategy and further increase returns on capital." Part of that plan was announced earlier today when the company reported that it is acquiring the 50% of Shanghai Starbucks Coffee Corporation that it did not previously own as part of a joint venture. This acquisition is expected to add approximately $1 billion in revenue in its first year after the deal closes, and should remain accretive over time. Management is confident in this market, believing that its stores in China "are among the most innovative, coffee-forward Starbucks stores in the world." In addition, this region represents the company's fastest growing international market, and this deal is the largest acquisition in company history. Management is hoping to capitalize on this deal as CEO Kevin Johnson noted on the call that the opportunity for growth in China is "unparalleled."

On the other hand, Starbucks announced that it plans to close all 379 of its Teavana stores through the coming year, with most expected to close in the Spring of 2018. We do note that Starbucks has a strong commitment to its employees, or partners, as they will receive opportunities to apply for positions in main Starbucks stores as the company looks to create 240,000 new jobs around the world and specifically 68,000 in the U.S. over the next five years.

Digging deeper into the quarter, global comparable store sales (SSS, "comp sales" or "comps") increased 4% for the quarter, but this still not where management had originally intended the number to be. The China Asia Pacific (CAP) region delivered 1% growth for the quarter, but we note that China comp store sales increased 7% with a 5% increase in total transactions. While growth slowed for the whole region, this market is still expected to be its largest segment by revenue in the years to come and management's confidence in its new acquisition strengthens this outlook. In addition, despite the sluggish sales, net revenues for the region grew 9% for the quarter, reaching $840.6 million due to 1,056 net new stores and an improved margin by 280 basis points. Still, this region is lagging on the company's SSS goals, hurting its out outlook going forward.

Importantly, comps in the Americas came in at 5%. This marks an improvement from last quarter where SSS came in at 3%, and is much more in line with the company's target of 5%+ SSS growth in the Americas. This level is where investors have become comfortable with the company growing from quarter to quarter, and moves the year to date total to 4% for the region. However, we note that this is still short of the original guidance that management originally set out. Comprising the same store sale increase was a 5% increase in average ticket. From a total revenue perspective, the company reported a 10% year over year, bringing its total to $4 billion for the quarter. We do want to point out though that revenues can be lifted from new store openings, which makes same store sales the more important metric.

Strong U.S. performance represents a big lift for the company after missing last quarter, but it does not appear it is enough to carry its overall comps. Sales have been hurt in the past due to the quick implementation of its mobile technology, flooding lines and creating a "mosh pit" of congestion in its queues. However, management reaffirmed its commitment to improving this the "on-the-go" experience is what consumers are shifting to, and Starbucks is laying the groundwork to stay ahead of demands. Starbucks Rewards remained flat at 36% of U.S. company-oriented sales, and membership stayed the same at 13.3 million active members. Mobile payment increased to 30% of transactions in the U.S., and mobile order and pay increased to 9% transactions of U.S. company operated stores, representing a slight increase from last quarter. Management knows how critical a digital presence is to the future of the company, and we fully expect them to develop the product so that it works with their goals, and not against it. Improvement needs to be made in this area (and fast) to help the company build on growth, where anything less will contribute to missed targets.

Looking at guidance, management now expects revenue growth to fall to the lower end of its previous guidance of 8%-10% for the year. In addition, they are cutting the EPS forecast for next quarter to $0.54-$0.55, down from previous expectations of $0.57-$0.60. They see global comp growth to be in the 3% to 4% range, which represents a more consistent range with what the company has produced this year.

Bottom line: While the company was able to deliver results in-line with its consensus through improvement in global comparable stores sales, the change in forward outlook was discouraging. Lagging same-store sales across all regions have diminished the company's original expectations, despite its growing business in China. Although we expect Starbucks' digital relationships and goal to find new ways to engage customers to continue to be a major theme for the company moving forward, progress has not been made to where it is reflected in same-store sales. We note that we have trimmed some of our position on strength to limit our exposures to weak guidance from the macro environment as was announced today. While we remain holders in the name, we will be listening closely to CEO Kevin Johnson tomorrow morning on Squawk on the Street for more details of the quarter and his outlook on guidance. But if we don't like what we hear we are tempted to tell you to move on even as we can't because we will be restricted. We have grown tired of the company's inability to turn this battleship around in any sustained way, and we think that the company's weak performance could continue trending through next year. While we hate to say it, there are better stories elsewhere in the market, and we will promptly update members tomorrow morning.

At the time of publication, Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, was long SBUX.