Why did Starbucks' earnings decline in the quarter?

Earnings fell due to a 4% decline in global comparable store sales, driven mainly by a 6% drop in transactions. Margin pressure came from deleverage on lower sales, higher store partner wage and benefit costs, increased promotional activity, and higher G&A supporting the Reinvention plan. The prior-year quarter also included a $91.3 million one-time gain from the Seattle's Best Coffee sale, which is excluded from non-GAAP results.

How did the company's regions perform?

North America revenue was flat at $6.4 billion with operating margin of 18.0%, down 110 bps, as U.S. comparable sales fell 3%. International revenue fell 5% to $1.8 billion, with China comparable sales down 11%, and operating margin declined 370 bps to 13.3%. Channel Development revenue fell 13% to $418 million, largely due to the Seattle's Best sale and SKU optimization, though its operating margin remained high at 51.7%.

Is the dividend still safe given the earnings decline?

The board declared a $0.57 quarterly dividend, up from $0.53 a year earlier, and the company has paid dividends for 56 consecutive quarters. Year-to-date dividends paid totaled $1.29 billion against operating cash flow of $2.89 billion, which provides coverage. However, with GAAP EPS of $0.68 for the quarter, the payout ratio is elevated, and investors should watch whether future earnings growth can support continued increases.

What is the company's balance sheet and leverage position?

Long-term debt rose to $15.5 billion from $13.5 billion after the $2.0 billion February bond issuance, which the company said would fund general corporate purposes including upcoming maturities. Cash and equivalents declined to $2.8 billion from $3.6 billion at fiscal year-end. Shareholders' deficit widened to $8.4 billion, a common feature of companies that have aggressively returned capital, though the deficit alone does not indicate solvency risk.

What should investors watch for going forward?

Key items include the fiscal 2024 financial targets discussed on the earnings call, the pace of comparable transaction recovery in the U.S. and China, whether margin pressure from partner wage investments and promotions abates, and the effectiveness of the Triple Shot Reinvention with Two Pumps plan. Continued store growth, which reached 38,951 stores, and Starbucks Rewards engagement, with 32.8 million active U.S. members, will also be important indicators of long-term traction.

SBUX 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed April 30, 2024. Cited figures are marked; the original filing is the authoritative source.

Starbucks reported fiscal Q2 2024 (quarter ended March 31, 2024) results that fell short of expectations, with consolidated net revenues down 2% to $8.6 billion^a (down 1% in constant currency) and global comparable store sales declining 4%, driven by a 6% drop in comparable transactions partially offset by a 2% increase in average ticket.

U.S. comparable store sales fell 3%, with transactions down 7%, while China comparable sales dropped 11%. GAAP EPS was $0.68^b, down 14% year-over-year, and non-GAAP EPS was also $0.68, down 8% (7% in constant currency). The prior-year comparison was flattered by a $91.3 million gain on the sale of the Seattle's Best Coffee brand, which makes the year-over-year decline look somewhat worse at the operating line.

Margins compressed meaningfully. GAAP operating margin fell 240 basis points to 12.8%^c, driven by deleverage, higher store partner wage and benefit investments, increased promotional activity, lapping the Seattle's Best gain, and higher G&A tied to the Reinvention plan. Non-GAAP operating margin contracted 150 basis points to 12.8%.

North America revenue was flat at $6.4 billion^d with operating margin down 110 basis points to 18.0%, while International revenue fell 5% to $1.8 billion and operating margin dropped 370 basis points to 13.3%, with China a notable drag. CEO Laxman Narasimhan acknowledged the quarter did not meet company expectations, while CFO Rachel Ruggeri emphasized disciplined capital allocation. Fiscal 2024 financial targets were not included in the release and were to be discussed on the earnings call.

On the balance sheet and cash flow side, the company raised $2.0 billion in bonds in February and reported cash and equivalents of $2.8 billion at quarter-end, down from $3.6 billion at fiscal year-end. Long-term debt rose to $15.5 billion from $13.5 billion, while shareholders' deficit widened to $8.4 billion. Year-to-date operating cash flow was $2.9 billion versus $2.4 billion a year earlier, and capital expenditures increased to $1.3 billion.

The company returned substantial capital through $1.3 billion in dividends and $1.3 billion in share repurchases over the first two quarters. The board declared a quarterly dividend of $0.57 per share, up from $0.53 a year earlier, extending a streak of 56 consecutive quarterly payouts.

Net new store growth continued, with 364 net openings in the quarter to reach 38,951 stores globally, though the store count increase did not translate into revenue growth given weak comparable sales. Starbucks Rewards U.S. active membership reached 32.8 million, up 6%, which is a relevant positive engagement indicator amid traffic declines.

02—Key points

Key Highlights

Consolidated net revenues fell 2% to $8.6 billion; global comparable store sales declined 4%, with transactions down 6% and average ticket up 2%.
GAAP and non-GAAP EPS were both $0.68, down 14% and 8% year-over-year respectively; the GAAP decline was amplified by lapping the $91.3 million Seattle's Best Coffee sale gain.
GAAP operating margin contracted 240 bps to 12.8%, reflecting deleverage, higher partner wages and benefits, increased promotions, and higher G&A tied to Reinvention.
China comparable store sales fell 11% and International operating margin dropped 370 bps to 13.3%, making international the weakest segment on profitability.
North America revenue was flat at $6.4 billion, but operating margin fell 110 bps to 18.0% as comparable transactions dropped 7%.
Company issued a $2.0 billion bond in February and declared a $0.57 quarterly dividend, up 8% from $0.53; cash fell to $2.8 billion while long-term debt rose to $15.5 billion.
Fiscal 2024 financial targets were not included in the release and were deferred to the earnings call, leaving forward guidance for investors to be assessed separately.

03—Questions

Frequently Asked Questions

Why did Starbucks' earnings decline in the quarter?
Earnings fell due to a 4% decline in global comparable store sales, driven mainly by a 6% drop in transactions. Margin pressure came from deleverage on lower sales, higher store partner wage and benefit costs, increased promotional activity, and higher G&A supporting the Reinvention plan. The prior-year quarter also included a $91.3 million one-time gain from the Seattle's Best Coffee sale, which is excluded from non-GAAP results.
How did the company's regions perform?
North America revenue was flat at $6.4 billion with operating margin of 18.0%, down 110 bps, as U.S. comparable sales fell 3%. International revenue fell 5% to $1.8 billion, with China comparable sales down 11%, and operating margin declined 370 bps to 13.3%. Channel Development revenue fell 13% to $418 million, largely due to the Seattle's Best sale and SKU optimization, though its operating margin remained high at 51.7%.
Is the dividend still safe given the earnings decline?
The board declared a $0.57 quarterly dividend, up from $0.53 a year earlier, and the company has paid dividends for 56 consecutive quarters. Year-to-date dividends paid totaled $1.29 billion against operating cash flow of $2.89 billion, which provides coverage. However, with GAAP EPS of $0.68 for the quarter, the payout ratio is elevated, and investors should watch whether future earnings growth can support continued increases.
What is the company's balance sheet and leverage position?
Long-term debt rose to $15.5 billion from $13.5 billion after the $2.0 billion February bond issuance, which the company said would fund general corporate purposes including upcoming maturities. Cash and equivalents declined to $2.8 billion from $3.6 billion at fiscal year-end. Shareholders' deficit widened to $8.4 billion, a common feature of companies that have aggressively returned capital, though the deficit alone does not indicate solvency risk.
What should investors watch for going forward?
Key items include the fiscal 2024 financial targets discussed on the earnings call, the pace of comparable transaction recovery in the U.S. and China, whether margin pressure from partner wage investments and promotions abates, and the effectiveness of the Triple Shot Reinvention with Two Pumps plan. Continued store growth, which reached 38,951 stores, and Starbucks Rewards engagement, with 32.8 million active U.S. members, will also be important indicators of long-term traction.

04—Continue

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