Get off the Comp Number, Towards Better Restaurant Analysis
On July 25 2013, Starbucks (SBUX) delivered a Q3 double revenue and profit beat for the Street and stellar worldwide comparable sales (comps) of +8% (+9% in the US). Some analysts, were concerned about the SBUX Q4 forecast of the 5-7% range.
The high Q3 comps said by SBUX to be a kind of spike. SBUX explained that mid single digit comps were likely in Q4. CEO Howard Schultz explained that it would be irresponsible for SBUX to forecast high comps if they believed not attainable and that SBUX business trends were very solid. He sharply concluded….
Now having said that, our expectations of ourselves that we are going to deliver a healthy comp growth in Q4 that our investors will be proud of. Let’s get off the comp number, because it’s not the issue, the issue is we are building a great extraordinary endeavoring company and the comps are going to follow that.
See the SBUX comps chart below. Were the sell side analysts right to be concerned about Starbucks comp "slowing up?"
|SBUX Parameter||FY2012 full year||Q3 2013||2013 to date||Q4 forecast||FY2014 Outlook|
My opinion: Perhaps. But other questions should have been asked.
In the retail and restaurant space, comp sales from year to year are given way too much emphasis in reporting and analysis. It becomes the headline bumper sticker. The metric, which strips out newly opened or closed stores that are "immature", is a proxy for business cadence and optempo momentum, and sometimes a proxy for profit flow through.
But the analytical problem is the year to year comp is only so meaningful. What happened last year—the base for the comp—could have been impacted by many factors such as weather, calendar shift, competitive and marketing calendar shifts and so forth. It’s certainly possible to have a great ten year, five year or two year comp trend, but to have a flat or so so current quarter comp calculation. Of course, the beginning of comps deceleration is an important investor signal and will first be seen on quarterly or monthly comps reporting. Only McDonald’s (NYSE:MCD) reports monthly comps.
Investors of all sorts—and analysts-- need to ask more meaningful questions about the comp trend. After getting the comp results, and hopefully a customer traffic and average ticket breakout, here are some more meaningful questions:
- Did the comp achieved meet your internal budget?
- What is the comp on a two year basis, a five year basis?
- Did you have to make tradeoffs to get this comp?
- What’s the comp on a rolling twelve month or rolling two year basis?
- How much profit flows through to the store level from this comp?
- How much is the flow through on a percentage of incremental sales basis?
- What is the standard, or theoretical profit flow through?
- Is the incremental flow through attained via higher cost percentage leverage?
- How much does incremental store level profit flow through to the corporate bottom line?
- How does this comp affect variable compensation payout accruals?
One question to consider is this a monthly or period or how many weeks were included in this comp and the prior period. For instance, the hugely symbolic and massive market capitalization of McDonald’s (NYSE:MCD) still reports on a traditional monthly basis, which makes for calendar noise.
In the restaurant space, there is an inordinate amount of short term action to maximize the comp. Better investor and sell side questions might enable the company to explain its rationale, and true picture better.