Starbucks (SBUX): Here are the factors that impacted growth in Q1 2024

Shares of Starbucks Corporation (NASDAQ: SBUX) stayed green on Wednesday. The stock has dropped 14% over the past 12 months. The company reported its first quarter 2024 earnings results a day ago, with revenue and profits witnessing year-over-year growth, but missing expectations. The coffee chain faced unexpected headwinds during the quarter which impacted its growth momentum.

Headwinds

As mentioned on its quarterly conference call, Starbucks started the first quarter of 2024 on a strong note but by mid-November, it started facing challenges. Firstly, the tensions in the Middle East have impacted the company’s business in the region, taking a significant toll on traffic and sales.

Secondly, the company stated that the events in the Middle East had an impact in the US, driven by misperceptions about its position. Despite higher frequency and spend from loyal customers, the coffee chain saw softness in its US traffic.

To tackle this, Starbucks rolled out targeted offers to bring its occasional customer into its loyalty program. It is also using data analytics and AI to provide incentives to customers, and making use of marketing and social media to engage with its audience. These initiatives helped bring about a rebound in occasional customer traffic in December, but the full fruition of the company’s plans will take time.

Lastly, Starbucks saw a slower-than-expected recovery in China, as customers remained cautious. The company saw increased pricing competition caused by overall market weakness. Nevertheless, Starbucks remains optimistic about the long-term potential in this region. It believes the market will evolve into a larger and tiered one as per capita consumption increases, shaking out excess competition in the process.

The java giant is working on driving growth in China through product innovation, technology investments and store expansion. It launched 12 new coffee-forward beverages in Q1, and its digital channels accounted for 52% of sales, which was up 4 percentage points sequentially. The company is also opening more stores in lower tier markets and new county cities where new store economics is meaningfully stronger. It remains on track to achieve its target of 9,000 stores by 2025 and is bullish on the market opportunity.

Quarterly performance

Starbucks’ consolidated revenues increased 8% YoY to $9.4 billion in Q1 2024. Global comparable store sales rose 5%, driven by growth in comparable transactions and average ticket. GAAP EPS grew 22% to $0.90 and adjusted EPS rose 20% to $0.90. Despite the YoY growth, the top and bottom line numbers fell short of estimates. GAAP operating margin expanded 140 basis points to 15.8% in the quarter.

Outlook

Starbucks revised its full year 2024 outlook due to the headwinds faced in the first quarter and the time it will take for its action plans to bear fruit. The company now expects global revenue growth of 7-10% versus the previous range of 10-12%. It expects global and US comp growth of 4-6% and China comp growth of low single digits. Adjusted EPS growth is expected to be 15-20%.