Starbucks (NASDAQ:SBUX) recently reported mixed earnings report in Q3. While the business hit a revenue record, same-store sales globally only increased globally by 4%. Sales growth was much less than what the market was anticipating. More specifically, while ticket prices rose by roughly 4% across all Starbucks stores total transaction count was roughly unchanged year-over-year.
This continues a somewhat strange pattern in Starbucks same-store sales growth with same-store sales growth over the course of the year declining steadily from 8% in Q1 to 6% in Q2 and now 4% in Q3.
Starbucks management attributed the slowing same-store sales in Q3 to several different factors including broader economic malaise and general uncertainty amongst consumers as well as a change in the execution of Starbucks loyalty program.
I'm inclined to believe management and attribute the puzzling changes in same-store sales to a mix of economic factors as well as execution of Starbucks loyalty program.
In and of themselves these factors speak to cyclical issues and execution problems rather than some underlying structural phenomenon which will be difficult for Starbucks to correct.
Certainly economic conditions have been variable for much of the course of this year and could be thought to have had some impact on Starbucks sales over the last quarter.
I would also suggest that such pronounced changes in the same store sales growth would be unlikely to occur from structural factors, which would more likely take several years to take effect. It seems unusual that consumption should change in such a haphazard manner over the year.
The one concern I do have with this latest set of numbers is whether they could be highlighting some structural implications in Starbucks latest results, particularly in the US.
The retail sector in general is undergoing significant transformation in the US. Consumers are shifting their spending from in-store retail to online. That's a transformation that has been unfolding over the last few years and is likely to accelerate over the next few years.
While Starbucks isn't directly exposed to this transitional shift, I have been wondering whether there maybe indirect impact on Starbucks from fewer visits to malls and shopping areas where Starbucks stores are situated..
While a good portion of Starbucks traffic is regular coffee consumption by people on their way to work and from work, and at various times of the day I have to guess that many visits to Starbucks occur socially, via people visiting local malls and shopping areas and consuming their favorite caffeinated beverage in the course of one of these trips.
As visits to multiline department stores and malls starts to fall through the floor, the question in my mind is whether Starbucks will see collateral damage and if in fact some of the weakness in US same-store sales comps that are coming through actually speak to a moderate decline in incidental or spontaneous purchase.
This is something that I'll be looking to watch more closely in Starbucks results over the course of the coming year. Cyclical variability in consumption is to be expected and will occur with fluctuations in economic growth and consumer confidence. However structural changes are much more difficult to correct.
Potential moderations in US growth and US demand have to be counterbalanced by the much more optimistic emerging markets story that seems to be unfolding around Starbucks.
Chinese sales were again highlighted in Starbucks results, with same-store sales in China up from 7% year on year. As GDP growth continues to increase in emerging market economies my sense is that Starbucks will continue to be a beneficiary as increasing income is dedicated to casual consumption and purchases of affluence.
As a premium coffee provider and an aspirational brand globally I believe Starbucks will continue to be a net beneficiary from these trends. Starbucks is on pace to rollout roughly 3400 stores across China by 2019 and believes that the Chinese market could eventually be as large as current sales in the US..
That alone should keep Starbucks on a solid growth momentum over the next few years even with possible structural declines in the US market.
Disclosure: I am/we are long SBUX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.