Sector financial performance:

This company, who primarily owns and operates Starbucks Coffee stores serving coffee, tea &snacks, has been grouped into restaurants-coffee, tea &snacks sector in foodservice industry.

It seems that the slowing down traffic is the major reason contributing to slowing down increase in comparable sales for those coffee and baked food restaurants in the past several years. Data indicates that the average increase in comparable sales all across this sector went down from around 4.7% of 2015 to around 0.8% of 2018.  Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015.  However, companies in this sector present strong ability to expand its business by opening new stores (both company-owned or franchised) and it seems, in terms of margin of new store, the demand in the newly developed market for their new stores is strong. In addition, still strong demand allowed companies in this sector to adjust menu/sale mix to generate more spending per customer to offset the decreasing traffic. This is probably why we are seeing that for most companies they have been able to present positive growth in their comparable sales while decrease in traffic.

For many companies in this industry, franchising their company-operated restaurants obviously has been the focus of their business strategies in dealing with unfavourable climate of this industry. It seems it is easy, due to high margins and strong market demand, to find franchisees for their restaurant expansion.

Our data indicate that, while slowing down comparable sales, there are general improvements in franchising companies’ gross margins (went up to 63% in 2017)  in the past several years benefiting from shifting of revenue to re-franchising and rising menu price. With an average of 22% SG&A percentage of sales, the average franchising companies’ operating reaches 44% in 2018. For companies with owned stores, the margin decreased as traffic slowed down (increasing check size was offset by promotions as estimated). The typical gross margin for non-franchising company is about 23% with 7% SG&A percentage of sales and 16% operating margin.

The average cash flow per share of companies in this sector increased slightly in 2017 and 2018 probably as a reflection of combination of decreasing margins and store &re-franchising expansion.

According to our analysis, the current companies’ enterprise price/EBI ratio is average 31with an interest/EBITDA ratio of 15%.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to this sector than to other restaurants.

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Company performance:

It seems that the demand for the service/products of this company domestically and internationally (China/Asia) has been strong. Although the growth in comparable sales and traffic has slowed down due to either the nature of coffee retailer industry or the decrease from real demand, this company’s sale has been driven to grow by new store openings. The downward trend in demand, as indicated by transaction counts, continued and accelerated in 2018.

The first nine months of fiscal 2018 compared with the same period of 2017(ended 20180701)                                       

                                                      Comparable sales                   traffic                  ticket size

Company-owned stores                 2%                                          -1%                      3%

Americas                                        2%(1% for 2Q)                      -1%(-2% for 3Q)  3%

 The first three months of fiscal 2018 compared with the same period of 2017                                        

                                                      Comparable sales                   traffic                  ticket size

Company-owned stores                 2%                                          0%                        2%

Americas                                        2%                                          0%                       2%

Fiscal 2017 compared with 2016

                                                      Comparable sales                   traffic                  ticket size

Company-owned stores                 3%                                          0%                        3%

Americas                                        3%                                          -1%                       4%

Fiscal 2016 compared with 2015

                                                      Comparable sales                   traffic                  ticket size

Company-owned stores                 5%

Americas                                        6%

Fiscal 2015 compared with 2014

                                                      Comparable sales                   traffic                  ticket size

Company-owned stores                 7%

Americas                                        7%

Its gross margin (including sales costs, occupancy, operating, and depreciation) has been flat at around 23-24% between 2015 and 2017. Its G&A as percentage of sales has been flat at around 6% and its operating margin has been flat at around 17% during the same period. However, operating margin went down to about 16% in 2018 as costs of products and operating expenses increased.

Stock price

This stock currently has an enterprise price/EBI ratio of 30. We think that its stock is being relatively slightly valued considering the downward trend in traffic.