The popularity of nitro cold brew coffee could help drive even better comps for Starbucks in the U.S. Image source: Starbucks.

Starbucks Corporation (SBUX -0.75%) reported third-quarter financial and operating results on July 21, and it was another record quarter for the company. Record revenue. Record profits. Record traffic. But at the same time, growth has slowed a little, with comp sales -- that is, sales at company-owned stores that have been open for at least 13 months -- increasing 4% in the quarter, after increasing 6% in the second quarter and 8% in the first. That's trending the wrong way, Fools. 

Factor in concerns over the company's new rewards program, rolled out early in the quarter, and is there reason to worry? Probably not, at least according to management. Let's take a closer look at Starbucks' earnings report, as well as what management had to say. 

The numbers

MetricQ3 2016Q3 2015Change
Revenue  $5,238.0  $4,881.2 7.3%
Net income  $754.1  $626.7 20.3%
Earnings per share  $0.51  $0.41 24.4%
Operating margin 19.5% 19.2%  +30 BPS

Revenue and net income in millions. Data source: Starbucks.

Even with comps growth slowing, the company continues to benefit from its scale, driving higher operating margins and net income from every dollar of new revenue it earns. 

Keys to the quarter

Let's take a closer look at those comps:

  • 4% comps in Americas; down from 7% in Q2 and 9% in Q1.
  • 3% comps in China/Asia Pacific; same as Q2 but down from 5% in Q1. 
    • China comps were 7%, showing the strength and potential of this burgeoning market within the region.
    • Japan has weighed heavier on comps the past two quarters, following the inclusion in the comp base of 1,009 stores in December previously owned by a licensee. 
  • -1% comps in EMEA, down from 1% growth the past two quarters.
    • This was primarily foreign exchange-related. Transactions were flat, while average ticket amount declined 2%. 
    • Starbucks also has sold 226 company-owned stores in this region to licensees over the past 12 months, altering the comps mix each quarter as a result. 
    • COO Kevin Johnson said that systemwide comps in EMEA were 2%. 

As I pointed out in the second-quarter earnings review, comps only measure the results at company-owned stores. This is important, because a lot of Starbucks' stores aren't company owned, particularly in the EMEA and China/Asia-Pacific regions. In EMEA, for example, the company plans to open 250 stores this year, with almost all of them licensed, 900 stores in China/Asia-Pacific with two-thirds licensed, and half of its 750 planned Americas stores to be licensed. 

In other words, comps are growingly measuring less and less of the stores' growth. 

It also doesn't measure growth of the Channel Development segment, which continues to be a powerhouse contributor.

  • Channel development revenue grew 9% last quarter, and operating margin was 42.6%, more than double the 19.5% operating margin of the consolidated business.
  • Last quarter its sales were only 8.4% of Starbucks' total revenues, but it contributed 18.4% of the company's entire operating income. 
    • The company said increased sales of single-serve (K-Cups) and packaged coffee, and higher income from its joint venture with PepsiCo, Inc., which started distributing Starbucks ready-to-drink coffee beverages in 10 Latin American countries this year, as keys behind the strong surge in revenue and operating margin. 

Mobile continues to be a strong growth driver as well. 

  • The Mobile Order and Pay app has gained traction, with 5% of all orders made via the app last quarter. 

What management said

Frappuccino Happy Hour wasn't as happy this year, likely because of overlap with the new rewards program launch. Image source: Starbucks.

CEO Howard Schultz didn't beat around the bush, saying the following early in his prepared remarks:

Does a 4% positive same-store sales comp from our U.S. business in Q3 signify or even suggest a turning point in Starbucks' long-term growth trajectory? And does this comp figure in any way relate to the success and value of our Starbucks Rewards loyalty program? On today's call, we will demonstrate with clarity and specificity why our U.S. comps in Q3 were an anomaly, and that we have clear line of sight to returning our business to historic levels of comp growth, which has been at or above 5% for the past 25 consecutive quarters.

Schultz went on to describe the launch of the new rewards program, and how it differs from the prior program, but how the unintended consequences of the launch, which corresponded with Starbucks' usually hugely popular "Frappuccino Happy Hour" summer promotion, may have been untimely, saying that recent results from the rewards program have been strong.

Schultz also described a positive trend in new stores that led to a decision to accelerate the pace of store openings:

Perhaps the best evidence of the strength and resilience of Starbucks business and brand is the robust performance of our newest class of retail stores, both in the U.S. and around the world. Record AUVs and record profits, with both growing and causing no net cannibalization of existing stores in the same trading area. This consistently strong performance drove our decision to open 1,900 net new stores around the world and over 600 alone in the U.S. in fiscal 2016, a pace of new store openings that we will be increasing both in the U.S. and around the world in 2017 and beyond.

A lot is happening to fuel future growth

Starbucks is working with a surprise partner -- AB Inbev -- to bottle and distribute its Teavana ready-to-drink teas. Image source: Starbucks.

Despite the minor comps concerns in the U.S. which management took head-on, Starbucks has a lot of things lining up to help continue driving future growth. A few of the initiatives just getting started, or set to launch soon:

  • Accelerated national launch of nitro cold brew coffee due to its popularity.
  • Early stages of Latin American ready-to-drink rollout via PepsiCo partnership. This is a $4 billion market opportunity. 
  • New Partnership with Anheuser Busch Inbev to produce and distribute RTD Teavana teas in early 2017. 
  • Partnership with Tingyi in China for RTD products on track to launch before end of calendar 2016. 
  • Starbucks Roasteries and Reserve stores.

That's above and beyond the planned expansion. In the earnings release, the company announced it would open 1,900 net new stores in 2016, 100 more than were initially planned, and Schultz said that they would be increasing the pace further "in 2017 and beyond," both internationally and in the U.S. based on the success of the most recent store format. 

Looking ahead

Starbucks' full-year financial guidance is as follows:

  • Revenue growth of approx 12% including the gains of a 53rd week this fiscal year.
  • Earnings per share of $1,88-$1.89 (up from $1.85-$1.86 due to gains on the sale of the German stores to a licensee). 
  • Consolidated comparable store sales in the mid-single digits. 
  • Slightly increased operating margins. 

There's always the chance that management is wrong, and comps don't bounce back. But I wouldn't bet against it, barring a major economic downturn. Furthermore, even if comps don't return to 5%-plus growth in U.S. stores overnight, there's a lot more happening that's working well.