Friday, December 5, 2008

Starbucks and Disclosure of Same Store Sales

Last January, Starbucks announced that it was no longer going to provide same store sales numbers to investors as it executed its turnaround strategy.  At the time I said it was a mistake (see my post “Starbuck’s Grande Mistake” January, 31, 2008) and I still continue to think so.  But it’s been almost a year and I thought I would go back and see what Starbucks has done on this single, but important, disclosure item.

On a quarterly basis, they’ve been true to their word.  In the third quarter of 2007, before the ban on disclosing this metric, Starbucks’ press release mentioned comparable store sales 11 times, including citing the percentage increase as a highlight.  The 10 Q report for the same period mentioned comparable store sales 16 times.  (Lest anyone out there think that I am a geek sitting here counting words, let me assure you that my computer performs this task much better than I can.  It’s extremely useful when comparing one period’s reporting to another.  See my post “How to Read 10 K and 10 Q Reports, September 8, 2008.  I may be a geek when it comes to investor relations, but I’m not a total geek.)

Now move forward a year to the third quarter of 2008.  Starbucks’ press release only mentions comparable store sales twice.  The first time, in discussing sales results, they say: “The company’s lower than expected revenue growth was driven by continued slow traffic trends in the U.S., which resulted in a mid-single-digit decline in U.S. comparable store sales, and was a slight deterioration from the second quarter.”  So now Starbucks has taken away a lot of discussion and precise numbers from a year ago and replaced it with ambiguity.  If I’m an analyst and I hear “mid-single-digit”, my reaction, fair or otherwise, is that the decline is in the upper end of that range.  In the same release, of even more interest, is the way Starbucks phrases things when discussing their targets: “These targets reflect the company’s current assumption that fourth quarter company-operated comparable store sales trends will remain relatively stable with the third quarter.”  As someone who has written his share of press releases, I’ve got to admire the way Starbucks took a trend of mid-single-digit declining comparable store sales and made it sound stable.  In a fashion similar to the press release, the 10 Q report for the same period only mentions comparable store sales 3 times without citing a specific amount.

So when I went to this year’s Fourth Quarter Press Release and Annual Report on Form 10 K, I expected to see a similar dearth of discussion surrounding comparable store sales.  To my surprise, I found that this year’s 10 K actually has more mentions of comparable store sales this year (22 vs. 20), while the Press Release saw a moderate decline in mentions from 13 a year ago to 9 this year.  Not only that, but both the release and the 10 K filing mention specific numbers when discussing comparable stores sales. It was one of those moments when you lean back from your computer screen and go, “Huh”.  It also meant a lot more work, because now I had to go through the 10 K filing in detail to try and figure out what was going on. What I found was that this year’s Management’s Discussion and Analysis contained slightly more mentions of comparable store sales than in last year’s report, while everything else in the filing was pretty much the same year over year.  It was as if Starbucks had never changed its mind on disclosing the metric.

Obviously, I’m not privy to the internal discussions Starbucks has when preparing their securities filings, but, in my opinion, one of two things happened: either the accountants and the lawyers simply marked up last year’s 10 K and nobody else paid any attention to the filing (unlikely given that the 10 Q reports had significantly fewer mentions of comparable store sales) or the lawyers finally got some backbone and said something along the lines of, “Look, this number is so important and the trend is so significant, that you have to disclose it and talk about it.”  I wish I could have been a fly on the wall during those discussions.  Whatever the reasons, I am glad to see that the company is disclosing such an important number.  It would also appear that the company is continuing to discuss comparable store sales, as they discussed them at an analyst conference yesterday.

The takeaway for investor relations professionals for all of this is that you can’t hide important metrics about your company when the trend turns bad.  When Starbucks stopped disclosing same store sales numbers it was just as the numbers were headed south after many years of strong positive sales growth.  If the numbers were important when they were good, they are important when they are bad.  All Starbucks did was postpone the inevitable to the end of the year.  It was very short-term thinking on their part to think that they could spin the issue when it revolved around such a key number.

1 comment:

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