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What to Look For When Starbucks Corporation Reports Earnings

By Jason Hall – Jul 15, 2016 at 12:00PM

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The coffee retail giant will likely continue to report strong and steady growth, but investors should pay closer attention to its plans for driving sales and profits.

Starbucks wants to sell you more than just coffee, and not just at Starbucks. Image source: Getty Images.

Starbucks Corporation (SBUX -0.90%) is set to report its third-quarter financial and operating results on July 21, and as always, the expectations are high. That's to be expected, considering the retail coffee giant has consistently grown sales and profits at or near double-digit rates for years. 

But can the company continue driving such strong growth? Only time will bear that out, but the upcoming quarterly earnings release and call with management will be a great chance to get a better idea of what the company is doing to keep growing. 

Here are the key things investors should learn more about when Starbucks reports earnings on the 21st. 

New stores remain the foundation of growth

Starbucks ended 2015 with around 24,000 stores, but management sees plenty of opportunity to continue expanding its store base. Through the first two quarters of the year, the company has already opened 878 new stores in 2016, and has plans to open close to 1,000 more before year-end. China/Asia Pacific, as in recent years, is a pretty major area of focus for store openings. Of the 1,800 net new stores Starbucks intends to open in 2016, fully half of them will be in CAP, while 700 will be in the Americas and 200 in EMEA (Europe, Middle East, and Africa). 

For the most part, the geographic mix of its net new stores will look similar to last year:

Image source: Starbucks.

In coming years, there's no getting around how important Asia -- particularly China and Japan -- will be for Starbucks' store growth plans. The company expects to open around 500 net new stores in China alone every year for the next five years. 

A snippet from a recent Starbucks presentation says a lot: China's middle class population is on track to grow from 300 million in 2016, to 600 million by 2022. Considering the company only just reached 2,000 stores in the country, there's a lot of room to continue growing the store count for many years to come. 

But it's not just about China and Asia. The company is still finding room for new stores in many of its markets, including more mature ones in North America, and a big part of its expansion plans at home in the near future will likely be driven by new formats:

Image source: Starbucks.

Investors would do well to listen to what management says about its new store formats, especially ones such as its Reserve Roasteries, which could be a great source of accelerated growth in more mature markets in coming years. 

Starbucks all day, everywhere

There's probably no better broad-brush way to describe the core strategy behind the company's growth efforts. Inside the company's stores, Starbucks offers a variety of food and beverage options beyond the morning cup of Joe, and much of its growth has been driven by expanding these all-day offerings.

Image source: Starbucks.

Last quarter, the company said that its tea business grew 17%, largely driven by sales of Teavana handcrafted beverages in stores. Food sales were up 16% last quarter overall, with breakfast sandwich sales up 30%, and lunch food sales up 18% from last year. Technology is also driving growth in the stores, with management saying its Mobile Order & Pay app was a key driver behind the 13% growth in sales the company saw during its morning hours. 

It's also about more than Starbucks inside your local Starbucks. As I highlighted last quarter, the company's most profitable and fastest-growing segment is channel development, which is all the various Starbucks products at your local grocer, convenience store, or other retail establishment; things like K-Cups, Frappuccino cold beverages, or a bag of Starbucks coffee beans.

This segment produced less than 10% of revenue last quarter, but more than 20% of operating income. This is a big impact business, and it's set to see accelerated growth. Here are three big catalysts:

Expanded K-Cup business: Already the #1 K-Cup brand, Starbucks said last quarter that its new agreement with Keurig would allow it to sell directly into key distribution channels, and is expecting to grow sales by 20% in 2016. 

Nespresso single-serve: This will be Starbucks' first entry into the huge European single-serve market. The company estimates half of its European customers own a Nespresso machine, and there are approx. 25 million installed globally. The company enters this market in the fall. Listen for more details on this launch, because it could significantly improve the company's business in EMEA. 

Consumer packaged beverages: Much like its store footprint in China, the company has huge room to expand its ready-to-drink business there. The company says the Chinese ready-to-drink coffee and energy market is worth $6 billion per year, and its partnership with Tingyi, which will expand its retail distribution to more than 1 million locations this summer, is on track to drive big growth in channel development, while also increasing the company's brand appeal across China. 

Looking ahead

Starbucks' management held firm on guidance for the full year last quarter, calling for 10%-plus revenue growth, and comps "somewhat above" the mid-single digits, even after falling short on both of these metrics in the second quarter. Guidance for GAAP earnings per share is $1.85-$1.86 for the full year, on slightly increased operating margin. For the third quarter, earnings per share are expected to be $0.47-$0.48. 

But be sure to look beyond the top- and bottom line results. Starbucks has achieved its stellar numbers over the years because its management has done an exceptional job of finding ways to grow its appeal to more customers and in more ways. Take the time to understand both how the company is doing on its initiatives, as well as what the company plans to do to keep driving growth in years to come. 

Jason Hall owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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