Starbucks must focus on increasing customer frequency: Analyst

Starbucks (SBUX) has released its third quarter results, showing mixed performance. The coffee giant reported revenue of $9.1 billion, falling short of the estimated $9.2 billion, and experienced a 3% decline in same-store sales. However, the company's adjusted earnings per share (EPS) of $0.93 slightly exceeded the expected $0.92. RJ Hottovy, Placer.ai head of analytical research, breaks down the report.

Hottovy notes that investors "were bracing for the worst" due to last quarter's foot traffic trends. However, he points out that the report showed "positive sequential momentum" and progress in product innovation, though he acknowledges that Starbucks still has "some things to work on."

With rising competition in the coffee chain space, Hottovy suggests that Starbucks' main focus should be increasing customer frequency. He emphasizes that Starbucks needs to ask itself, "How do you get that brand back in focus? How do you bring people back into those stores more frequently? I think that's the big message."

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This post was written by Angel Smith

Video Transcript

Starbucks just reporting mixed third quarter results, the coffee giant same store sales falling 3%.

That is slightly worse than expected.

Placer A I Head of analytical research RJ Hoty joins us now with the reaction to the print RJ, it's always good to see you.

So look at the stock, it's actually popping about 2% here in the after hours.

RJ.

But let's start with your response to the print uh RJ.

What do you make of it?

Yeah, looking at the numbers, I mean, I think the U SI think a lot of investors were bracing for the worst after last quarter in terms of uh visitation trends, they came in slightly better than at least the consensus numbers that I've seen uh maybe a little bit of relief on that.

Uh Still negative, obviously uh negative six in terms of comparable transactions.

Um So this company still got some things to work out but positive sequential momentum and maybe evidence that some of the things they're working on in terms of new product innovation, in terms of discounting and value, uh maybe paying off and driving more visits.

So initial reaction um you know, still a lot of work to do for the company, but also some progress compared to last quarter.

And what are your, uh what is your data showing you in terms of what are our people, how are traffic trends looking at Starbucks and in terms of what people are spending as well?

Yeah, so our data, if we adjust for the 5% new stores that are in the system compared to last year, uh, We're generally showing uh visitation trends down year over year as well.

But the important thing too is that one of the things that the company focused on is bringing back more of the occasional users.

And we did start to see a bit of progress on that as the quarter progress, some of that lined up with the promotion, some of that lined up with some of the new summer beverages that they launch.

We are starting to see a little bit of encouraging that those kind of everyday kind of occasional users are starting to come back.

Uh I wouldn't say it was, you know, in droves, but certainly some, some positive momentum on that.

And so, uh the company continues to see more visitors than ever before.

Uh just getting frequency uh encouraging more frequent visits, which I think a lot of the initials that they have have given time to play out.

We'll start to do that.

RJ.

Uh activists are involved in this name.

Um Got uh Paul singer involved in his firm, you know, to the extent they have an undisclosed stake for, for the journal.

I'm just curious to the extent that they, you know, they wanna see changes, you know, you know, the company very well.

RJ.

What kind of changes if they do press for them?

Would you think they, they may emphasize.

Yeah.

And, and Elliott is a smart group too.

So I, I, I'm sure they've got some, some big vision for, for the company here too.

My, my thought is um really just kind of getting that, that occasional user.

Um You know, we've seen Starbucks uh a lot more competition from the likes of Dutch, bro, some of the more private uh coffee chains coming up, even more competition from QSR and other channels as well.

Uh How do you get that brand back in focus?

How do you bring people back into the stores uh more frequently to the, I think that's kind of the big message.

Um You know, we've seen a lot of changes in consumer behavior.

That's what our data shows.

More people coming into different day parts, people wanting different things, people wanting uh new innovation.

And I think that Starbucks is starting to act upon that, but maybe not to the same degree uh that they need here too.

So, um yeah, probably more in terms of innovation.

Uh The company talked about efficiency in the press release throughput during peak hours has always been an issue here.

Uh That's another thing that I think they can work on better balance between the in store experience and the digital mobile ordering app.

Uh I think that's something that the, uh, the company needs to look at.

So if I'm going through the checklist of probably what they're looking at, it's probably looking a lot like that.

And it, it's interesting because when they said envision see in the release, I think not only of throughput and like getting your coffee when you want your coffee and not encountering the scrum there.

Um but also them saving money.

So my question was sort of how do they, you know, be cost effective?

Well, at the same time, improving on those things that you're talking about, like innovation and like throughput, it's, it's a broad based effort to be honest.

And II, I think the company has made inroads into some of the things they need to do there.

And really with the company, if you think about it, it was built on the third place experience, it was this place away from home and work and built on this experience.

But, you know, over the last decade, obviously, convenience and mobile ordering has come in and really the company is trying to serve two different audiences.

At the same time, the experience customer as well as a mobile ordering customer.

And so I think a lot of that efficiency comes down to identifying what store serves, what need.

And so you might have an experience store, a larger format store, even one of the groceries and across the corner, you may have a smaller format store.

And I think some of the things they're doing in terms of mobile or mobile only pick up type locations, smaller format.

Um I think you can start to better address consumer need states with the different locations that they have.

And you know, when we do see similar um you know, locations located nearby, we do and they clearly have a need state served.

We do see some positive uh or some really encouraging visitation trends when we look at that.

So that's one of the things I think they need to address here.

You know, RJ, we talk about Starbucks obviously the giant, what about its smaller rivals?

You know, Dutch Brothers, for example, how, how are they performing?

What are you seeing there?

Yeah, we're seeing some positive, positive traffic trends and to be honest, uh Dutch bros and many of its other competitors kind of in the drive through small box coffee Space are generally outperforming the category and uh outperforming Starbucks at this time.

I think some of this has to do with picking the right markets.

Dutch bros is going into markets where we generally see uh underserved markets.

So kind of the Tennessee Missouri Oklahoma space generally underserved in terms of uh coffee visitation.

So I think that they're in the picking right markets uh, they're also doing a good job kind of addressing the move away from urban to more suburban and rural locations.

Uh, I've done a good job with that, but also good job with menu innovation.

Good job with throughput.

They're, they're kind of doing the things that Starbucks needs to look to.

Um, in terms of, uh, you know, just the whole package here, innovation experience throughput, uh, doing a lot of things right there.

So our data says some pretty encouraging numbers for uh for Dutch bros and a lot of their competitors RJ.

Thanks a lot.

Good to see you.

Thanks.