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Starbucks Earnings: 3 Trends to Watch

By Demitri Kalogeropoulos - Updated Oct 30, 2017 at 12:21PM

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The coffee titan has a lot to prove to investors on Thursday.

Starbucks (SBUX 3.76%) will announce results for its fiscal fourth quarter after the market closes on Thursday, Nov. 2. Here are the key trends investors will be looking for in the report.

Customer traffic

Starbucks put up a few impressive operating and financial numbers last quarter. The company added 575 new stores to its sales base while posting an uptick in the growth rate at its existing locations. However, one critical number is headed in the opposite direction, and that slump is pushing comps results below management's expectations this year.

Chart showing customer traffic gains by year.

2017 is through fiscal Q3. Data source: Starbucks filings.

Starbucks' customer traffic is down 1% over the past nine months. The dip is part of a long-term trend for the chain, but some of it can be pinned on the industry slowdown that's hurting so many retailers today.

Yet growth is out there for the taking. McDonald's (MCD 2.46%) just announced its second straight quarter of 6% comps, after all, as its customer traffic gains accelerated to over 2%. The fast-food giant made changes to its menu and improvements to its stores, and its fans have responded by filling its booths. Starbucks is after a similar result, and this week's transaction trends will help investors judge whether it is moving closer to -- or further from -- that goal.

China growth

China is one area where Starbucks isn't having trouble growing today. Traffic is up in that market so far this year, and so is average spending. The country is becoming much more profitable, too, with operating margin up over 2 percentage points to 27% of sales last quarter.

An iced Starbucks coffee sitting on a table.

Image source: Starbucks.

China is critical to Starbucks' overall expansion hopes. In fact, with 1,000 store openings slated for fiscal 2017, it represents about half of the company's entire global footprint increase for the year. CEO Kevin Johnson told investors in August that their $1.3 billion store buyout in the market reflects "our long-term commitment to China and our unwavering optimism about our future in that key market." 

That's why investors will be looking for healthy comps gains in the China division this week. Strong numbers in the market are needed to support Starbucks' plan of roughly doubling its restaurant base there to 5,000 by 2021. 

Food sales

Starbucks is placing a lot of hope on its ability to market more food to its coffee-drinking customers. Food orders boost average spending, but more importantly, they spur store visits during Starbucks' traditionally slow lunchtime hours.

Food sales have been stuck at 19% of the overall business for each of the last two years despite a successful rollout of a bigger breakfast menu. Starbucks' goal is get that number closer to 25% over time, and an expanded lunch offering could help.

There's reason for optimism, here, given that the company generated 21% of its revenue in the U.S. market from food sales last quarter. Its fresh food lunch concept did well in the Chicago test market, so executives sped up its rollout to other areas this summer, including Seattle. We'll get an update this week on whether that initiative is performing well enough to start making Starbucks more of a lunchtime destination.

Starbucks executives expressed caution about their fourth-quarter forecast back in August, and their outlook now implies the coffee titan will come up short on both its sales and profit growth targets for the year. Their comments this week on fiscal 2018 will show whether management thinks Starbucks can make a quick rebound toward the goal (set late last year) of double-digit sales growth and earnings improvements of at least 15% annually through 2021.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$79.26 (3.76%) $2.87
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$252.96 (2.46%) $6.08

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