Continuing our discussion of the state of Starbucks (NASDAQ:SBUX) about half a year after founder Howard Schultz relinquished the role of CEO to become Executive Chairman, we take a birds-eye view of the business and consider the specific trends investors should follow with Kevin Johnson at the helm.
While it's inevitable that the company's growth will slow in the future, it can still provide a handsome return to investors.
A full transcript follows the video.
This video was recorded on Sept. 12, 2017.
Vincent Shen: The big thing that seemed to drive the market's reaction to the latest results, like you mentioned, them having to step down on guidance and the growth not quite being at levels that, frankly, investors have come to expect, and management having to push back on that a little bit. Some other big developments that I think were relevant to the long-term growth runway for this company, for example, something that flew under the radar a little bit more as a result of the market reaction to the quarterly results, Starbucks spent $1.3 billion also to acquire the remaining half of its joint venture in China, which effectively brings that entire Chinese business entirely into the Starbucks fold. And this is a big development, because China is a huge market and a growing one for them. A lot of people believe it will become as important as the U.S. market in terms of the scale and the profitability. Keep in mind, I think Shanghai actually lays claim to the most Starbucks locations, with about 600, of all the major cities that Starbucks operates in.
Something else I thought was interesting, too, in terms of when Howard Schultz stepped down as CEO, he's still with the company, but his focus has turned to the food and dining side. Food is actually about 20% of revenue for the company now, growing in its own importance. Schultz wanted to take some of his time and focus on developing these destination restaurants and premium experiences under the Starbucks brand. In terms of these other initiatives, both abroad with these other categories in terms of restaurants, what do you think, Asit? Is this enough, you think, to satisfy investors as long as the company has some time to get its legs and keep hitting on the numbers they need to hit, and growing, especially, their presence in China?
Asit Sharma: Depends on your holding period. Foolish investors tend to hold on to great stocks as long as it's humanly possible. If you're that type of investor, then Starbucks is doing all the right things. The two examples you mentioned, Vince, are both pushing toward one goal, and that's to increase the operating margin of Starbucks. Over time, the long-term, owning its own locations in China makes a lot of sense, because that's a greater amount of margin that will fall to the bottom line. There was a period where Starbucks thought a great mix would be 60-40, meaning about 60% self-owned stores and 40% franchise stores, would help them grow really quickly. And they've done that in China. But if, inevitably, growth slows, what do investors then love? They love earnings. And we've seen companies historically, like McDonald's, like Coke, that have been able to satisfy investors as their growth slowed by increasing profitability.
So what you mentioned, Vince, this drive to acquire the rest of its remaining joint venture on the mainland in China is actually going to really help earnings far down the road. Same with moving toward packaged goods that they're selling in store aisles, to the premium roastery concept, which Howard Schultz is also pushing, that is to provide these, again, experiential purchasing experiences in beautiful roastery environments in major cities, and up our desire to buy a higher level of coffee, which drops a higher level of margin to Starbucks' bottom line. So if you intend to hold this stock past a three year period -- say five years, seven years, ten years and beyond -- it makes a lot of sense. And I think that the new CEO, Kevin Johnson, shares these broad goals with Howard Schultz. And as I've said just a few moments ago, he's an operations guy. He's someone who can execute on this vision. So, I think the company is in good hands and still has a bright future. I know we said we wouldn't talk about the stock price, but since Howard Schultz announced he was stepping down, the stock is down about 7.5%. Not much at all. That was, again, since December of last year. But not the typical growth Starbucks has had over the last few years. I think it will resume for those who are patient.
Shen: And just to close out with a set of numbers that puts some of that international growth opportunity, especially in China, into perspective, you look at what is currently the most important market for the company, the United States, and the number of locations they have, I think somewhere in the neighborhood of 14,000 locations just in this country, whereas in China with their current base of about 2,500 stores, it just puts into perspective what the opportunity still exists there, and what investors can look to and track the progress of as a key priority for the company going forward.
Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.