Starbucks beats the Street, turns around domestic slump
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Starbucks beats the Street, turns around domestic slump

Luxury coffee giant Starbucks has reversed a domestic slump to post better than expected results in its latest quarter. The company, whose growth largely rests on two markets, China and the U.S., made headway in both to deliver results that hint at a turnaround for the business. Unsurprisingly, investors sent its share price up in late trading.

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When it comes to comparable sales – a key metric for the coffeehouse kingpin – Starbucks’ quarter impressed. In its domestic market, the US, Starbucks has seen sluggish growth for the past year. But in the last quarter, it exceeded analysts estimates by posting 4% growth, year on year (the Street had hoped to see 2.8%). Starbucks’ fortune in China – long a key driver of growth for the brand – also improved, and comparable sales strayed back into positive ground after a period of declines, rising by 1% against the year-ago quarter. Starbucks also outperformed consensus estimates on overall comparable sales growth, delivering 3% year on year.

Although it might not be the headline figure, growth in China might be the most important takeaway from this quarter’s earning report. A tumultuous fiscal year for Starbucks has left some observers wondering whether the difficulties it was having in the east were the to-be-expected growing pains of a brand undergoing massive and rapid expansion overseas – or whether they hinted at a more fundamental difficulty. Given Starbucks’ long history of success with Chinese consumers, common sense might lean towards the former – but common sense is not always in great supply.

The turn back to growth offers considerable support for the view that Starbucks’ Chinese business remains on the right track – and that consumers are catching up with a pace of expansion designed more to capture market share in an emerging coffeehouse market than to translate directly into high sales. The company is opening 600 locations a year in China, and aims to have 6,000 by 2022. A new delivery partnership in the country with Chinese tech titan Alibaba is likely to strengthen Starbucks’ Chinese business even further.

In the U.S., Starbucks has battled against the same trend that other restaurants are contending with: slower traffic, as people opt to stay in. But Starbucks’ position as a coffeehouse first has helped it to weather than storm better than most, as comparable sales in at home demonstrated in the last quarter. With new drinks driving current trends in store, and higher than average checks bolstering sales, Starbucks is in as good a position as any of its domestic competitors.

Disclosure
Dominion holds Starbucks in its Global Trends Luxury Fund.


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