Starbucks on Tuesday said its U.S. same-store sales rose 7%, including a 1% increase in transactions, in the company’s fiscal third quarter. The Seattle-based chain generated the highest average weekly sales in its history, besting the last three months of 2022, which included the holiday season.
Customers continue to customize their orders with flavor shots and cold foam. And 40% of them are ordering food. The chain continues to grow its base of loyalty customers who come in more frequently and make larger orders and get larger drink sizes.
The brand has plans to grow delivery, now a nearly $1 billion business in the U.S. And it has plans to eye small towns and increase its beverage innovation. Oh, and its China business is recovering and the company increased its expectations for earnings.
Wall Street wasn’t all that impressed. Starbucks’ stock fell slightly in after-hours trading on Tuesday. And much of what analysts asked during the company’s earnings call appeared to betray a level of skepticism that the company can meet its revenue and same-store sales targets—despite executives’ assurance that it would.
“We just expect the momentum in the business to continue,” Rachel Ruggeri, Starbucks CFO, told analysts on Tuesday. “We were encouraged by the fact that our growth in [same-store sales] was a combination of transaction growth … coupled with an elevated ticket. And that was a combination of not only strategic pricing, but a balanced contribution from increased customization as well as record” food attachment.
To be sure, Starbucks’ U.S. same-store sales growth did slow on both a one-year and a two-year basis, from 24% in the company’s fiscal second quarter to 16% in its most recent period, its fiscal third quarter.
Traffic, meanwhile, remains below where it was in the same period in 2019—though the number of items sold per store is up over that period.
CEO Laxman Narasimhan said the company has opportunities “across the board” to improve. “There’s opportunities pretty much across the board,” he said, noting that beverage innovation, improving sales in the afternoons and delivery could all generate sales. “It’s a big and sizable business,” Narasimhan said. One such strategy is innovation. Starbucks plans to test a cold pressed cold brew at some locations, with the goal of implementing it systemwide by the end of the chain's 2024 fiscal year.
And company executives said that the brand is improving the efficiency of its stores after spending much of the past year overhauling operations, adding equipment and making changes designed to improve employees’ workdays.
“Our foundational reinvention program we announced last year is essential to the improvements we’re seeing now,” Narasimhan said. “There are meaningful improvements in the store environment, as well as the productivity gains that we’re making. Our peaks are growing faster than the rest of the dayparts.”
Same-store sales at the chain increased because customers came in more often, but also ordered more items when they did and paid higher prices.
Some of that is due to the company’s Starbucks Rewards loyalty program. The chain has 31.4 million such members in the U.S. alone. That’s up 15% from the same period a year ago, or about 4 million members. They represent 57% of the money spent at company stores. And they’re increasingly popular at the chain’s licensed locations. Executives said Starbucks Rewards customers can use their loyalty program at 40% of licensed locations.
Rewards members are valuable customers for the chain. “They come in more frequently, they buy more, and interestingly enough, we actually see the growth of our largest sizes over our smaller sizes.”
Company executives also believe they’ll generate sales through unit growth, particularly in smaller cities where the brand is underpenetrated. But they also see opportunities to add new types of locations in metro areas.
Starbucks is also quietly making inroads into delivery, a business the chain entered late, but which now generates nearly $1 billion in sales per year. Sales through the channel doubled compared with the same period a year ago. “We’re close to creating a $1 billion incremental leg in our delivery business from minimal presence a few years ago,” Narasimhan said.
And Starbucks is planning other digital innovation. The company plans to invest in artificial intelligence, using its Deep Brew machine learning system as a “launching pad.” The company’s focus, Narasimhan said, is to improve the worker experience.
So far, executives said, the chain’s efforts to improve workers’ experience are paying off. Investments the company has made in pay and the addition of tipping have increased workers’ take-home pay by 20%, Narasimhan said. That has helped improve retention by 11%.
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