5 Things Starbucks Wants You to Know

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Starbucks (NASDAQ: SBUX) is developing a bad habit of missing its sales and profit growth targets. Following a disappointing fiscal 2017, the company had predicted a modest rebound for the new fiscal year.

But that hasn't happened. Instead, the coffee titan last week posted surprisingly weak first-quarter results. Below, we'll look at the reasons CEO Kevin Johnson and his executive team gave for the shortfall, and why they're still confident Starbucks can meet its full-year targets.

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U.S. challenges

Starbucks missed its growth targets in the core U.S. market as the encouraging traffic uptick they noted at the beginning of the quarter fizzled and turned negative by the period's closing weeks. Executives pinned the blame on failed execution around holiday-themed beverages and merchandise. These drinks and products "did not resonate with our customers as planned," Johnson said, so comps improved by just 2% to pull global growth down to a 2% rate compared to their goal of between 3% and 5% gains for the full year.

China wins

While the U.S. market struggles, executives couldn't be happier with the company's performance in China. Customer traffic is growing at a healthy 6% pace there today, and profitability is expanding, too. That success supports Starbucks' aggressive plans to open 500 new stores per year in a country they believe will grow to many times the size of the U.S. market over time. "Starbucks has cracked the code on China," Johnson said, "and no western consumer brand is better positioned than Starbucks in China."

Cutting out what doesn't work

Starbucks' turnaround strategy involves exiting weaker business lines so management can focus its attention and resources on the most promising growth avenues. To that end, the company completed the sale of its Tazo tea brand and closed several Teavana retailing locations this quarter. Starbucks fans can expect see more simplification ahead as the company removes about 200 products, or 30% of its retailing merchandise, from its store shelves.

Speeding up the U.S. growth pace

Starbucks is posting healthy growth during its peak morning hours. However, customer traffic in the U.S. market isn't meeting expectations during the rest of the day when its more occasional shoppers tend to frequent its stores.

Management aims to fix that problem with help from a bulked-up food menu and innovative beverages like the blonde espresso roast and the Nitro cold brew. Investors will know whether these launches are working by watching customer traffic, particularly during what Starbucks calls its "afternoon daypart," over the next few quarters.

Still committed to targets

Starbucks' updated forecast predicts the company will only reach the low end of its sales growth guidance range of between 3% and 5% this year to mark no improvement over last year's expansion pace. Given the slow start to fiscal 2018, that means the chain will have to post significantly faster growth -- including a traffic turnaround in the U.S. -- over the next few quarters. Otherwise, management risks its second straight year of missing its annual performance targets.

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Demitrios Kalogeropoulos owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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