Starbucks (NASDAQ: SBUX) recently closed the books on a fiscal year that, while setting profit and sales records, missed management's key targets. Revenue rose 7% to lag its double-digit goal, and earnings growth, at 11%, was below the 15% to 20% executives predicted at the start of the fiscal year.
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CEO Kevin Johnson and his team held a conference call with analysts to discuss those results while issuing a new, more modest long-term outlook. Here are the key quotes from that presentation.
Back to traffic growth in the U.S.
Transaction [count] in the U.S., net of hurricane-related impact, was the strongest performance in 6 quarters.
-- CEO Kevin Johnson
After posting declining traffic in the U.S. over the first three quarters of the year, Starbucks returned to gains in the fourth quarter. The 1% uptick there was enough to push global traffic to flat to mark the second straight year of declining growth.
China is the future
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China continued its outperformance with 8% comp growth, its strongest in 9 quarters.
-- Chief Financial Officer Scott Maw
Even as the U.S. market struggled, China stepped up to contribute accelerating growth. Comps there improved 7% for the full year as profitability rose and the company added 550 new stores to its base.
With its pending buyout of 600 stores that Starbucks is currently running through a joint venture, this market will only grow in importance to the business over time. "Starbucks now has two significant profit engines driving our global returns," management explained, "our North American business and the broader [China/Asia Pacific] market."
Targeting food sales
Our food program continues to grow and expand, with food mix now over 21% for the first time ever.
Starbucks has been trying to expand beyond its beverage focus for years, but food sales held at 19% of the business in both fiscal 2015 and 2016. The company is seeing that trend improve now, though. Food contributed 2 percentage points of comparable-store sales growth for the third quarter in a row, management said, and its lunch menu upgrade is performing well in test markets.
The company believes food will be a major driver in boosting sales over the next few years, and management is hoping the segment will be responsible for 25% of sales by 2021.
New long-term targets
Today, we introduced new long-term financial targets: Comp growth of 3% to 5%, revenue growth in the high single digits, and EPS growth of 12% or better.
Executives highlighted the impressive run that the business has had since 2010, with sales more than doubling and earnings tripling. However, "we have not consistently delivered against our long-term financial targets" over the past two years, Johnson acknowledged.
In fact, Starbucks had predicted earnings growth of between 15% and 20% per year while forecasting 10% annual revenue gains. Both of those targets have been scaled back slightly.
A scaled-back expansion strategy
We are streamlining our business and directing our investments toward businesses and operations where our growth prospects and returns are the greatest.
Investors might still consider Starbucks' lower targets aggressive considering the sluggish retailing industry. But executives are counting on rising food sales and mobile ordering demand to push sales higher in the U.S. while the international segment benefits from China's long-term economic growth.
The company is narrowing its focus to just the most promising growth initiatives, which explains why it recently divested the Tazo franchise and closed its Teavana retail stores. Starbucks is still a growth brand, but its more modest outlook means management has to be picky about the expansion strategies it pursues.
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