The Mini-Monster Inside Every Starbucks' Earnings Report

It's still early in Starbucks' (SBUX -0.22%) CEO transition. About six months after founder Howard Schultz stepped down from the leadership role to become Executive Chairman, our Industry Focus: Consumer Goods crew takes stock of the company's long-term prospects. In this segment, they discuss one of the legacies that formed under Schultz and why it gives investors pause today.

A full transcript follows the video.

This video was recorded on Sept. 12, 2017.

Vincent Shen: Our last story here, with Starbucks, another case where they've driven this experience with their store, recreated the European coffee shop experience. We wanted to provide an update for the company, in that we're approaching about six months now since the founder, Howard Schultz, stepped down as CEO of the company. He passed the reins on to Kevin Johnson, who was formerly the COO. I won't speak too much about the stock price, since half a year is not much time for any CEO to leave their mark on a company, especially one this large. But investors weren't as happy with the latest quarterly results. Shares did trade down about 10% due to some reduced guidance and lowered expected growth. Asit, you've been following this company for some time. When people talk about things like market oversaturation for Starbucks and shrinking growth opportunities, what do you think shareholders should be focused on going forward?

Asit Sharma: One of the things shareholders should be focused on is Starbucks' ability to divorce itself from a goal that it created. There's a mini-monster in every Starbucks earnings report, and that is the U.S. comparative sales. How did stores in the U.S. do versus last year's comparable quarter? Starbucks had an incredible streak. I think it went over 25 consecutive quarters or so of U.S. comparables -- we call them comps -- U.S. comps growth of 5% or more. Quarter after quarter after quarter. And it became kind of this rallying cry, and investors and analysts became addicted to this number. And it was part of the reason that the stock has had such a great run, because it seems like Starbucks was capable of this almost linear growth that was just going to occur, and they had the entire globe to keep opening stores. The U.S., despite other industries seeing slowdowns over the last five or six years, Starbucks was able to keep showing that growth.

What's happened is, inevitably, U.S. growth has slowed a bit. The company had a couple of quarters this year where it hasn't hit that 5% mark. For this most recent quarter, they did. If you are an investor, you're rooting for management to get beyond that. We've seen Howard Schultz, in his last couple quarters as CEO, try to push back at the notion that the U.S. stores should hit this number every quarter. So that's a good sign. You're looking for Starbucks, though, to be able to keep traffic in their stores flowing. At some point, and we don't know when this is, 10 years, 15 years, the globe will become saturated with Starbucks stores. The density in the U.S. is already reaching a point where you're having to go to secondary metropolitan markets to find growth. So as an investor, you want to see what Starbucks can do to keep driving traffic. And so far, they've been pretty successful. They have the seasonal promotions that everyone is familiar with, the pumpkin spice latte. They continually upgrade their mobile ordering capabilities to get customers in stores continually through their loyalty program. And the product is addictive. So I think as an operations person, Kevin Johnson, the new CEO, part of his job is merely to keep that traffic flowing, and that's what you're looking for whenever you read through a Starbucks report.