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Starbucks Earnings: 3 Things to Watch

By Demitri Kalogeropoulos – Jan 20, 2018 at 10:32AM

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What to look for in the coffee titan's earnings report next week.

Few consumer businesses can claim anything like the operating success that Starbucks (SBUX 0.33%) has had in the 25 years it's been on the public markets. Just since 2010, revenue has more than doubled and earnings have more than tripled.

Yet the coffee titan's latest fiscal year marked a departure from that market-thumping growth streak, as sales and profits both came in well short of the management's forecast. Below, we'll look at a few of the trends that will determine whether Starbucks starts moving in the right direction with its first quarterly report of fiscal 2018, set to be released on Thursday, Jan. 25.

Coffee beans on a table.

Image source: Getty Images.

Customer traffic

Starbucks managed just a 3% comparable-store sales increase in 2017, which means comps have now been decelerating for two consecutive years and are sitting at less than half the rate shareholders enjoyed in 2013 through 2015. Sluggish customer traffic growth has been the main driver behind this slowdown, as the metric fell to a flat result last year to continue a multiyear negative trend.

Chart showing declining customer traffic growth.

Data source: Starbucks. Chart by author.

Starbucks wouldn't need a sharp traffic rebound to achieve significantly higher revenue. Just look at the recent example of McDonald's, whose guest count increased by 2.1% over the past nine months, compared to a 0.1% decrease in the prior-year period. That success helped push comps up to a blistering 5.6% rate from 4.2% in 2016.

Starbucks isn't expecting a dramatic rebound like that, but management did note that traffic improved at its fastest rate in nearly two years in the key U.S. market last quarter. Thus, a comps uptick might come from continued positive momentum here.

Food sales

Starbucks' growing food initiative was one of the bright spots of fiscal 2017. After staying stuck at 19% of sales despite breakfast menu additions in 2015 and 2016, food sales finally edged up to 20% of the business last year. In fact, that segment hit a record high in the most recent quarter thanks to drink platforms like ice tea infusions that bring customers into stores beyond Starbucks' peak morning hours. These beverages pair well with lots of food options, and so they're helping boost customer traffic and average spending.

Starbucks CEO Kevin Johnson and his executive team believe a fresh-food lunch menu will help them push food sales up to 25% of the business by 2021. We'll find out on Thursday just how successful these new offerings have been at helping the chain expand beyond its early morning focus.

The long term

In late 2016, Starbucks' long-term plan predicted annual revenue gains of 10% that would translate into an earnings improvement of between 15% and 20% each year through 2021. Yet the next few quarters didn't unfold as expected, and the weaker operating reality led management to dial back both those sales and profit targets just a year after issuing them.

Starbucks' updated prediction forecasts comp growth of between 3% and 5% leading to sales gains in the high-single digits, with earnings rising by about 12% each year.

There might be more revisions to these targets -- in either direction -- given all the changes coming through in the business. A modest customer traffic rebound might put the chain on pace for a sales rebound like the one that McDonald's recently enjoyed. If demand trends instead continue slowing as they have since 2015, then shareholders can expect more modest growth that depends mainly on overseas markets like China.

Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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