Please ensure Javascript is enabled for purposes of website accessibility

What to Watch When Starbucks Reports Earnings

By Jason Hall – Nov 2, 2016 at 5:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When the coffee giant last announced earnings, slowing same-store sales spooked Mister Market. Here's what investors should pay attention to.

Starbucks' focus on delighting customers remains a key to its success. Image source: Starbucks.

Since Starbucks Corporation (SBUX 1.21%) last reported earnings in July, its shares have fallen about 8% following an earnings release that showed same-store sales, or comps, only grew 4% in North America. This was one of the company's worst comps growth performances in its largest market in years, and combined with general economic concerns both at home and around the world in the months since, the market has turned a little unfavorable on the powerful consumer brand's ability to continue its fast rate of growth.

With earnings coming up on Nov. 3, what should investors expect? Let's take a closer look.

The growth story isn't over

While Starbucks' North American comps result was subpar for the company (it was the first quarter in more than six years with comps growth below 5%), CEO Howard Schultz was adamant that management believes that result was an "anomaly." Schultz said that a combination of bad timing and communication with the rollout of the company's new rewards program, along with economic uncertainty ahead of the upcoming election, contributed to the comps result. At the same time, he was clear about his expectation that the new rewards program, combined with other efforts to drive more traffic to Starbucks stores, would help comps growth recover.

But it's not just comps that management expects to continue growing. In the second-quarter earnings release, the company disclosed that it was planning to open 750 new locations in North America this year, 50 more than it had originally planned.

Starbucks' appeal continues to burgeon outside North America, particularly in Asia, which remains a huge growth market. Of the 1,900 net new stores to be opened in 2016, 900 will be located in China or elsewhere in the Asia-Pacific region. The majority of those stores will be in China, with the company targeting 500 net new stores in China per year over the next five years.

Starbucks' K-Cups are the No. 1 seller. Image source: Starbucks.

Another key component of Starbucks' growth as a brand is products for consumers to buy at non-Starbucks retailers, including grocery stores and convenience stores. These products are categorized in the company's channel development segment, which is on track to grow sales at a double-digit rate in 2016. And while this segment only makes up a small portion of revenues (less than 9% last quarter), it generates an outsize amount of profits. Last quarter, that 8.4% of revenue generated a whopping 18.4% of Starbucks' operating income.

Keep the long view with Starbucks

Starbucks, like all consumer-focused companies, will certainly feel some impact from global economics. And that means there will be times when its comps may not grow at the same rate as they have in recent history. But at the same time, Starbucks remains one of the strongest, most recognizable brands in the world, while also having great opportunities to continue its growth.

Furthermore, the company has also reached a scale where much of its growth drives profits and cash flows incrementally higher.

Put it all together, and Starbucks may or may not beat Wall Street's expectations when it releases its quarterly results on Nov. 3. But don't focus too closely on earnings per share, comps, and revenue results compared to Mister Market's reactions to them. Instead, keep your eye on how well the company executes on growing its store base, and managing expenses to generate operating profits that management is happy about -- and on how it delivers great products that delight its customers.

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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.