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Starbucks Corporation Talks Digital Strategy, Guidance, and Food Sales

By Daniel Sparks - Updated Nov 20, 2017 at 6:17PM

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Here's how Starbucks' digital flywheel is still a key catalyst, why Starbucks is betting big on China, and more.

Starbucks' (SBUX -0.33%) fourth-quarter results gave investors a useful glimpse into the coffee retailer's recent performance, putting the spotlight on positive comps and double-digit growth in earnings per share. But it also officially confirmed that Starbucks' guidance for 2017 was simply too aggressive, as full-year results underperformed management's initial outlook for the year.

Fortunately, management gave investors a closer look at its business during its third-quarter earnings call, as well as provided a much-needed update to its long-term guidance. Here's a look at three key takeaways from the earnings call.

The interior of a Starbucks store

Starbucks store. Image source: Starbucks.

The strength of Starbucks' digital flywheel

Starbucks is regarded as the pioneer in mobile loyalty programs and mobile ordering, proving how a well-executed digital flywheel can help increase sales. But even after years of success in digital, Starbucks' digital flywheel remains paramount to the company's long-term plans -- and it's still driving significant results.

Starbucks CEO Kevin Johnson explained (via a Motley Fool transcript):

Our priority to accelerate the power and momentum of our digital flywheel reflects the fact that digital relationships are among our most powerful demand generation levers. In fiscal '17, Starbucks Rewards membership in the U.S. rose 11% year over year. Per member spent increased 8% in Q4, alone. The cumulative fact is that today, 36% of tender comes from Starbucks Rewards, the vast majority, via our mobile app.

With this compelling data in mind, Johnson said the company will soon start making mobile order and pay available to all customers -- not just Starbucks Rewards members.

Starbucks' aggressive guidance

In Starbucks' fourth quarter, management revised its long-term guidance. While it was lower than what management was previously expecting in its long-term outlook, it was still notably aggressive when compared to Starbucks' recent results.

For its long-term outlook, management said it expected same-store comps over the long haul to average around 3% to 5% year-over-year growth. In addition, management said it expected non-GAAP EPS growth of 12% or greater. This compares to Starbucks' global comparable-store sales increase of 3% in 2017, and its 11.4% year-over-year rise in the coffee giant's non-GAAP EPS. 

So, how does management justify its optimistic outlook for its business? While Starbucks laid out a range of items to support this outlook, management emphasized two items it expected would contribute meaningfully to this future growth: its China and U.S. markets.

"I think China is the second largest and fastest growing market for Starbucks," Johnson said about Starbucks' immense opportunity in the country. "It is the second largest economy in the world. It is an economy that will have a growing middle class, doubling from roughly 300 million people to 600 million people."

Highlighting this growth market, China comparable-store sales were up 7% year over year in 2017, and 8% year over year in Q4.

In the U.S., Johnson explained that many of its recent efforts to invigorate its business have been showing early signs of promising long-term opportunities to help further boost sales and improve operations in the market.

"We've got a continuous improvement plan there that shows that we are growing through-put at peak and, at the same time, we're improving the customer experience," Johnson explained. "So, I think that gives us evidence that, certainly, we have line-sight to what we have to deliver to be in that comp range in the U.S."

Starbucks' growing food sales

One of the areas in which Starbucks hopes it sees an incremental increase in both revenue and earnings per share in the coming years is from food sales. And a bullish outlook for how food can impact its financials isn't simply speculation -- it's based on undeniable momentum in food today.

Turkey and stuffing panini Starbucks sandwhich

Starbucks food. Image source: Starbucks.

Starbucks global chief strategy officer broke down Starbucks' growing food sales for investors:

And then the last area is how do we continue to capture this opportunity that we're seeing on food and the attached rate that we're seeing? In the quarter, we grew food 15% year-over-year and food now is 21% of the overall mix of what we're selling through our U.S. stores -- we're seeing good, strong growth on breakfast sandwiches, we're seeing good strong on Sous Vide egg bites -- we now have that available in all our stores across the U.S. -- and then the last area is in the Protein Bistro Boxes and the impact that those are having.

Expecting continued innovation in food, drinks, and its digital experience, Ryan said Starbucks is "bullish" on the upside it can achieve in existing stores.

While management's explanations for its rosy outlook for the future are sensible, investors will want to check in on Starbucks' results in the coming quarters to see whether its long-term guidance is as conservative as management suggests it is.

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