Shares of Starbucks(NASDAQ: SBUX) are down by nearly 11% in the last year, mostly because of investor concerns about decelerating growth. However, management believes this is just a temporary slowdown, which could mean the short-term weakness in Starbucks' stock is creating a buying opportunity for long-term investors in the coffee powerhouse.
Is Starbucks getting cold?
Starbucks' total revenue during the quarter ended in June (the third quarter of the fiscal year for the company) increased 7% to $5.24 billion, while global comparable-store sales jumped 4% versus the same period in 2015. This is still a strong performance by industry standards, but it represents a slowdown for Starbucks in comparison to growth rates in prior years.
As a reference, fast-food giant McDonald's(NYSE: MCD) reported a 4% decline in consolidated revenue last quarter, mostly because the company is aggressively refranchising stores. On a comparable-store basis, McDonald's announced a 3.1% increase in global comparable revenue.
Competitor Dunkin' Brands (NASDAQ: DNKN) is doing considerably worse than both Starbucks and McDonald's. The company registered a 3.85% increase in revenue during the second quarter, with comparable sales in the U.S. growing 0.5% at Dunkin' Donuts and 0.6% at Baskin-Robbins. In international markets, Dunkin' Brands reported a 3.1% decline in comparable sales at Dunkin' Donuts and a 6.6% contraction at Baskin-Robbins.
See photos of Starbucks CEO Howard Schultz:
Starbucks CEO Howard Schultz
Starbucks CEO Howard Schultz
Starbucks Chairman and CEO Howard Schultz appears on the Fox Business Network's Opening Bell with Maria Bartiromo television program in New York City, November 6, 2014. REUTERS/Mike Segar (UNITED STATES - Tags: BUSINESS FOOD)
Howard Schultz, chief executive of Starbucks, poses for a portrait at his new Teavana store in New York, October 23, 2013. Starbucks Corp, which has doubled down on its tea bet, is opening its first Teavana tea bar in New York City this week, aiming to do for tea, the world's second most popular beverage after water, what it has done for coffee. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS FOOD)
Starbucks Corp Chief Executive Howard Schultz, pictured with images from the company's new "Race Together" project behind him, speaks during the company's annual shareholder's meeting in Seattle, Washington March 18, 2015. Schultz has deftly navigated thorny issues such as gay marriage, gun control and Congressional gridlock, but his move to weigh in on U.S. race relations has brewed up a social media backlash. The company kicked off the discussion when it published full-page ads in major U.S. newspapers earlier this week with the words "Shall We Overcome?" at center page and "RaceTogether" and the Starbucks logo near the bottom. REUTERS/David Ryder (UNITED STATES - Tags: BUSINESS)
Starbucks Chief Executive Howard Schultz speaks during the company's annual shareholder's meeting in Seattle, Washington March 18, 2015. Starbucks Corp will begin offering delivery in New York City and Seattle later this year, when it also plans to expand mobile order and pay services across the United States. REUTERS/David Ryder (UNITED STATES - Tags: BUSINESS)
Howard Schultz, Chairman and CEO of Starbucks, attends a dinner reception for Chinese President Xi Jinping in Seattle, Washington September 22, 2015. Xi landed in Seattle on Tuesday to kick off a week-long U.S. visit that will include meetings with U.S. business leaders, a black-tie state dinner at the White House hosted by President Barack Obama and an address at the United Nations. REUTERS/Jason Redmond
Howard Schultz CEO of Starbucks poses during an interview with Reuters in Shanghai April 19, 2012. Starbucks Corp wants to make its mainland China expansion a family affair. The world's biggest coffee chain is opening cafes in China at a rate of one every four days in its quest to expand from about 570 shops today to more than 1,500 by 2015. REUTERS/Carlos Barria (CHINA - Tags: BUSINESS COMMODITIES)
Starbucks CEO Howard Schultz speaks to shareholders about the company's partnership with the Keurig single-serve coffee brewing machine, at the company's annual meeting of shareholders in Seattle, Washington March 23, 2011. REUTERS/Robert Sorbo (UNITED STATES - Tags: BUSINESS)
Starbucks Chief Executive Howard Schultz talks to shareholders at the Starbucks Annual Shareholders meeting at McCaw Hall in Seattle, Washington March 19, 2008. REUTERS/Marcus R. Donner (UNITED STATES)
Starbucks Chief Executive Howard Schultz speaks during an interview in Tokyo April 13, 2010. Starbucks plans to sell its Via brand instant coffee in grocery stores and other retail channels outside its own outlets in Japan in the future, Schultz said. To match interview STARBUCKS/JAPAN REUTERS/Yuriko Nakao (JAPAN - Tags: BUSINESS HEADSHOT)
Howard Schultz, the President of Starbucks Coffee Company takes a sip of coffee as he assists in the opening of his first coffee house in Paris, January 15, 2004. The coffee house is situated on Avenue de l'Opera at the heart of Paris' tourist district. REUTERS/Charles Platiau PP04010041 MAL/WS
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Nevertheless, investors in Starbucks typically expect above-average performance from the company. Prior to its most recent report, Starbucks increased comparable-store sales at more than 5% for 25 consecutive quarters. Even if Starbucks is doing better than the competition, growth slowed down last quarter, and this is arguably the main reason the stock is under selling pressure.
What Starbucks' CEO wants you to know
Starbucks founder and CEO, Howard Schultz, was quite clear during the conference call on the fact that he considers the deceleration in growth a temporary problem as opposed to a sign of harder times ahead. In his own words:
On today's call we will demonstrate with clarity and specificity why our US comps in Q3 were an anomaly and that we have clear line of sight to returning our business to historic levels of comp growth, which has been at or above 5% for the past 25 consecutive quarters.
According to Schultz, the main reason for slowing growth in the U.S. last quarter is that Starbucks made two big moves at the same time. The company is modifying its customer loyalty program from a frequency-based to a spend-based model. The launch of the new customer loyalty program coincided with the company's much-important frappuccino happy hour promotion last quarter, an annual event that usually has a big impact on revenue.
Schultz explained in the conference call:
What we underestimated was the interdependence of Starbucks rewards and happy hour, and that two powerful initiatives competing for partner and customer mind share during a discrete period of time would disrupt what should have been strong, positive interdependence and leverage.
Growth drivers remain solid
Schultz is, of course, an interested party in this discussion, so investors need to take statements from Starbucks' management with a grain of salt. However, it's important to note that the company's growth drivers still look quite healthy.
Starbucks is one of the most powerful brands in the consumer sector, and customer loyalty can be an enormously valuable advantage for investors over the long term. Starbucks has over 12.3 million active rewards members in the U.S. alone, and the company gained 2 million new members year over year. In addition, Starbucks is an industry leader in terms of mobile ordering and payment technologies, a major plus in the industry nowadays.
Even in highly penetrated markets such as the U.S., menu innovation is a smart avenue through which to keep revenue growing. Over the past several years Starbucks made important acquisitions such as La Boulange, Teavana, and Evolution Fresh, and the company is smartly leveraging those purchases to drive sustained revenue growth and diversification into different product categories.
RELATED: Starbucks cups through the years:
Starbucks cups, different looks through the years
Starbucks cups, different looks through the years
CHENGDU, SICHUAN PROVINCE, CHINA - 2015/09/13: Coffee cup on table in a Starbucks cafe. Starbucks is streamlining the ordering process so customers are able to get that cup of coffee faster than usual. (Photo by Zhang Peng/LightRocket via Getty Images)
A cappuccino coffee sits in a Starbucks Corp. Reserve cup, used for specialist coffee, on the counter at a Starbucks coffee shop in London, U.K., on Friday, Oct. 16, 2015. Coffee futures fell the most in seven months after Colombia announced measures that will increase exports, spurred by the plight of farmers in the country who are dealing with drought conditions linked to the El Nino weather pattern. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
BEIJING, CHINA - 2014/12/24: A paper coffee cup and Starbucks logo. Starbucks will continue its expansion in China in 2015 and double its China store count to 3,000 by 2019. In its first-quarter fiscal report, the coffee giant shows optimistic expectation for its robust expansion plans in 2015. (Photo by Zhang Peng/LightRocket via Getty Images)
A Starbucks employee writes a message on a cup of freshly brewed coffee at a local store in Washington, DC on December 26, 2012. Starbucks stirred the political pot Wednesday by urging its baristas to write 'come together' on its cups as a way to pressure US lawmakers to compromise on a deal to avert a year-end fiscal crisis. Starbucks chief executive Howard Schultz said the American coffee giant was recommending its first-ever message on the side of tall, grande and venti (small, medium and large) drinks sold at its Washington stores as a way to help break the capital's gridlock on the so-called 'fiscal cliff.' Lawmakers and the White House have less than a week to work out a deal aimed at preventing tax hikes from hitting all Americans and a series of deep, mandated spending cuts from kicking in beginning January 1. AFP PHOTO/Eva HAMBACH (Photo credit should read EVA HAMBACH/AFP/Getty Images)
A Starbucks coffee cup is seen in this photo taken August 12, 2009. AFP Photo/Paul J. Richards (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)
MIAMI - JANUARY 18: In this photo illustration, the new Starbucks 31-ounce Trenta size ice coffee is seen on the right next to a tall cup of Starbucks coffee on January 18, 2011 in Miami, Florida. Starbucks rolled out the newest member of its lineup of drinks which is available only for Tazo shaken iced teas, iced tea lemonades and iced coffees. (Photo illustration by Joe Raedle/Getty Images)
TOKYO, JAPAN - SEPTEMEBR 26: Starbucks Coffe Company's news product 'Starbucks Discoveries'(Espressso (L), Latte (R)) are seen during a preview party on September 26, 2005 in Tokyo, Japan. 'Starbucks Discoveries' is the company's first chilled cup coffee product which will be available at convenience stores on September 27 in Japan with the same coffee beans used at Starbucks stores. (Photo by Junko Kimura/Getty Images)
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The company still has plenty of room to expand its store base in emerging markets, and China looks like a particularly promising country over the years ahead. Starbucks has nearly 2,300 stores in 100 Chinese cities, and it's planning to open 500 new stores per year in China over the coming five years. Comparable sales in China grew 7% last quarter, so demand looks as strong as ever in this key market.
Packaged goods is another compelling growth driver for Starbucks, allowing the company to capitalize on its brand value and expand revenue without the need to open new stores. Revenue in this segment grew 9% to $440.8 million last quarter, and operating margin in packaged goods was an impressive 42.6% of sales during the period.
Only time will tell for certain if the slowdown in growth is just temporary or something more permanent. However, customer loyalty, product innovation, emerging markets expansion, and opportunities in packaged goods look like compelling growth engines for Starbucks in the years ahead.
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