Starbucks (NASDAQ: SBUX) is set to post its quarterly results after the market closes on Thursday, July 27. The stock is trailing the market so far in 2017 as weak traffic trends have knocked the coffee titan off its target annual growth pace. But will Starbucks show a sharp operating rebound this week?
Here are a few of key metrics investors will be watching in the announcement.
Playing catch up
The company achieved record sales and earnings last quarter, but investors chose to focus on the less encouraging news of weakening operating trends. Over the last six months, sales are up just 6%, and earnings have expanded by 14%. Those figures trail Starbucks' target of 10% annual sales growth and 15% profit improvement.
Management is predicting a strong rebound for the second half of the fiscal year that will ultimately pull results back up to their goal. There are good reasons to expect at least a small bump this week, given that comparable-store sales jumped to a 4% rate in March from 3%, according to management. "We're seeing further acceleration into April," Chief Financial Officer Scott Maw said in a press release at the time.
Keep an eye on customer traffic, which slipped into negative territory recently and has been trending lower for years. Sure, Starbucks can move the growth needle by boosting average spending, but it can't expand for long without a healthy uptick in the volume of transactions its stores process.
Starbucks' 17.7% operating margin was a second-quarter record for the company and marked a solid improvement over the prior year's 17.3%. Looking behind that headline figure, investors saw a mix of good and bad news back in April. On the positive side, Starbucks' China geography posted a huge earnings spike as operating margin jumped to 22.9% from 19.1% a year ago. At the same time, its channel development segment, which includes sales of packaged coffee drinks to retailers, generated a healthy 42% margin for the quarter.
Dragging down those positive results was shrinking profitability in the core U.S. market that Starbucks pinned on increased labor costs, especially wages. This quarter will likely include a similar mix of opposing trends, with overall profitability ideally rising to another quarterly record.
If CEO Kevin Johnson and his team do end up pulling back their 2017 outlook this week, they'll likely blame a weak retailing environment for the downgrade. That's not what management has been signaling, though. In fact, Johnson predicted in late April that fiscal 2017 will be "the year of two halves" and that the company would deliver on its growth targets "despite the soft start" to the year.
In that scenario, mobile ordering, payment, and delivery will play a big role in any accelerating growth pace. Starbucks also aims to lean on food as a way to increase average spending in its restaurant locations over time. Executives see room to boost comps by as much as 2 percentage points with an expanded lunch menu that's being rolled out nationally. The company had similar success with its breakfast food options that have helped push food up to 19% of sales last year from 18% two years back.
Yet Starbucks is most excited about its long-term opportunities for international expansion. It aims to grow its global store base by 50% over the next four years. A huge portion of those gains will be in a Chinese market that's not only growing fast, but is also home to some of the company's most profitable locations.