Starbucks (NASDAQ:SBUX) reported a rare miss on comps and an in-line EPS. There were certainly a lot of concerns in the quarter given the difficult macro and the change in the loyalty scheme but SBUX's digital conversion remains the bright spot. Relative to the other listed QSRs, I believe that SBUX continues to have the most compelling digital ecosystem that should support comps in the medium-term. In addition, China remains the bright spot and I see plenty of upside for SBUX in the country as it scales up its geographic footprint. Over time, I believe that SBUX could achieve similar scale as YUM (NYSE:YUM) with KFC in China as it continues to take share from other lesser-known brands such as Coffee Bean. I reiterate SBUX being my top pick within the QSR space.
Earning stats aside, I think the ongoing expansion of SBUX's digital reward program was quite positive during the quarter with over 2m new members add this quarter to 12.3m active reward members, a +18% y/y growth. In the US particularly, rewards customers saw a +33% y/y growth. This is important given that rewards customers are repeat customers that have above average incentive to spend more given that they want to achieve the reward status faster. This bodes well for SBUX in the medium-term as it expands its other services such as mobile ordering and launching new initiatives that attract additional members. Not only is mobile rewards doing well in the US, SBUX has also been doing well in China where there are over 10m members alone.
The recent launch of mobile payment in China is consistent with the consumer preference towards mobile ordering and online-to-offline services. Although SBUX remains a premium beverage brand in China, the mobile reward is more compelling than that of its competitors and I think that will continue to attract the Chinese consumers. That said, I continue to like SBUX's mobile rewards program and I believe that the long-term membership conversion will drive long-term ecosystem expansion.
Although the US is facing some maturity, China/Asia Pacific remains a growth area and I believe that the +18% y/y revenue and +22% EBIT growth underscores my bullish view of the region. Comp sales of +7% in China suggests that the segment growth remains resilient and despite the concerns with the GDP SBUX continues to gain shares in the larger and more established cities such as Beijing and Shanghai and this is evident from the record profit that is generated by the new stores. SBUX targets +3,400 store counts in the country and I think that this type of aggressive expansion will allow SBUX to rival YUM's KFC footprint in the country.
In conclusion, I would buy on weakness and remain a long-term investor on SBUX given its digital/mobile expansion and growth outlook in China.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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