Starbucks Corp. reported better-than-expected quarterly results, luring back lapsed customers with coffee-focused ads and by removing extra charges for nondairy milk.
Same-store sales fell 4% in the three months ended Dec. 29, the company said Tuesday, an improvement from the 7% slump Starbucks reported in the prior quarter. Chief Executive Officer Brian Niccol, who joined in September, is working to stem a customer exodus sparked by boycotts, price increases and slow service.
Visits from guests who don’t belong to the Starbucks loyalty program increased in response to marketing emphasizing “the craft of our coffee” and “the premium experience you get from Starbucks,” Niccol told analysts. He added that dropping the upcharge for nondairy milk also helped bring back rewards customers who had stopped frequenting the chain.
“Baby steps,” Niccol said, “but all moving in the right direction.”
Earnings per share were slightly higher than the average estimate, while transactions in North America, the chain’s largest market, declined in line with expectations. Operating margin in the region fell because of higher spending on wages, benefits and hours, and due to the removal of the nondairy milk upcharge.
Sales fell by less than analysts anticipated in China, a key market where growth has suffered.
“We knew that it was going to take some time for them to turn around the business, but things seem to be moving in the right direction,” Matthew Goodman, a research analyst at M Science said in an interview. “The changes look to be starting to move the needle.”
Niccol is focusing on improving the store-experience, starting with the US and Canada. This week, the company brought back ceramic mugs and the condiment bar, while limiting cafe access to customers and their guests.
Starbucks also aims to simplify the menu and to speed up service, and on Tuesday Niccol said the chain would cut about 30% of its food and beverage lineup. He laid out a goal of delivering drinks to in-store customers in four minutes or less while streamlining mobile ordering. There’s a feature in development for the Starbucks app that would let customers select a pick-up time slot, Niccol said.
Severance, Restructuring
Starbucks shares rose less than 1% at 7:13 p.m. in extended New York trading, paring most of an earlier gain after Chief Financial Officer Rachel Ruggeri told analysts that general and administrative costs will spike in the company’s current quarter.
That’s due to severance payments and other benefits on the back of an impending restructuring. Earnings per share in the period are also expected to be the lowest this fiscal year, she said.
The Seattle-based company is planning to lay off corporate workers by early March. Niccol said in an earlier memo announcing the cuts that Starbucks has too many layers of management and there needs to be more clarity on who makes decisions and is accountable for achieving goals.
Starbucks in October suspended guidance for the fiscal year that started Sept. 30, saying the move would give Niccol a chance to assess the business and solidify a turnaround plan.
Investors will give the CEO time, but not indefinitely, said Brian Yarbrough, an analyst at Edward Jones.
“I would expect most people would want to see same-store sales in the US are starting to track positive in the fourth quarter,” he said, referring to the company’s fiscal period ending in late September.
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