Starbucks Falls Under McDonald’s Shadow

January 26, 2018 by Douglas A. McIntyre

Starbucks Corp. (NASDAQ: SBUX) is barely growing in the United States as it tries to expand further into the fast-food business. McDonald’s Corp. (NYSE: MCD), on the other hand, has started to regain some of its same-store sales and revenue growth, partially due to its breakfast and coffee menu.

Starbucks revenue rose 6.1% in the most recently reported quarter to $6.1 billion. Operating income was down 1.5% to $1.1 billion. U.S. and Global same-store sales rose 2%. Looking deeper, change in the number of translations was flat, which means price was a primary driver of an improved top line.

Among Starbucks notes for its full fiscal year guidance:

Continue to expect 3-5% comparable store sales growth globally, expect to be near the low end of the range for the year.

The “low end” comment spooked investors.

While McDonald’s revenue dropped 10% in the past quarter to $5.6 billion, most of this had to do with its program to refranchise some of its operations. Operating income rose 44% to $3.1 billion. The most impressive improvement was in same-store sales. Global comparable store sales rose 6%. U.S. sales rose 4.1%. Food sales were the primary driver, and the business that Starbucks wants to do better. McDonald’s management pointed out:

In the U.S., third quarter comparable sales increased 4.1%, reflecting the national beverage and McPick 2 value promotions, along with the continued success of the Signature Crafted premium sandwich platform. Operating income for the quarter increased 6%, reflecting higher sales-driven franchised margin dollars and G&A savings.

Wall Street savaged Starbucks shares after the announcement. They fell over 4% to $58.05. Over the past year, McDonald’s stock is up 44% to $61. Starbucks shares are higher by 4% during the same period.

Food has driven McDonald’s results recently. A failure in the fast-food business has tamped down Starbucks. Until it gets it food formula right, if it does at all, the trend probably will continue.

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