Despite challenges, Starbucks (SBUX) remains confident on growth opportunity in China

Shares of Starbucks Corp. (NASDAQ: SBUX) were down 6% on Wednesday after the company reported mixed results for the first quarter of 2021 a day ago. The stock has dropped 8% since the beginning of the year.

The effects of the COVID-19 pandemic continued to impact Starbucks’ operations but the investments made in digital capabilities benefited the company during the quarter as mobile ordering and drive-through sales gained momentum. Starbucks also continues to see growth opportunities in its second lead market, China.

Mixed Q1

Total revenues were $6.7 billion, down 5% year-over-year due to lower customer traffic, reduced store operating hours and temporary store closures. Adjusted EPS fell 23% to $0.61. The bottom line surpassed estimates while the top line fell short of expectations. Global comparable store sales declined 5% due to a 19% drop in comparable transactions.

Growth markets

In the US, comparable store sales declined 5% due to a 21% drop in comparable transactions. This was however, an improvement from the 9% decline seen last quarter. The company’s operations continued to be hindered during the quarter by resurgence in the pandemic and by the end of the period, limited seating was available in only around 40% of its US stores.

As customers adapted to work-from-home situations, Starbucks changed its strategy and invested in expanding its digital reach and improving its drive-through, curbside pickup, and delivery capabilities. Drive-throughs drove over half of net sales in the first quarter rising over 10% from pre-pandemic levels.

The company saw higher usage of its mobile app during the quarter, with mobile orders comprising 25% of US company-operated transactions, up from 17% before the pandemic.

In China, comparable store sales were up 5% driven by a 9% increase in average ticket. The main driver of growth in this market has been new stores. Starbucks opened nearly 160 stores in the region during the first quarter, bringing the total number of stores at the end of the period to 4,863 stores. This reflects a 13% growth in net new stores over the last 12 months.

During the quarter, Starbucks entered 15 new cities in China and the stores in these cities have performed well with customer traffic outperforming that of other cities in the country. This strong performance provides confidence with regards to the long-term growth opportunity in China. Starbucks expects to open approx. 600 net new stores in China during FY2021.

Outlook

For the full year of 2021, Starbucks raised its GAAP EPS outlook to a range of $2.42-2.62 from the previous range of $2.34-2.54. The company reaffirmed its guidance on other metrics with consolidated revenue expected to be $28-29 billion and adjusted EPS estimated to be $2.70-2.90.

Global comparable store sales are projected to grow 18-23%. The company expects to open approx. 2,150 net new stores and 1,100 new Starbucks stores globally during the year.

Click here to read the full transcript of Starbucks Q1 2021 earnings conference call