The past several years haven't been good ones for investors in Starbucks (NASDAQ:SBUX). The stock is lower than it was three years ago, while the broader market has gained about 32% -- this despite Starbucks stock hitting an all-time high in mid-2017. The coffee chain has been hampered by slowing growth, incidents of racial bias, and more recently the departure of Chairman Howard Schultz and the announced retirement of CFO Scott Maw, who will depart in November.
Investors will be watching closely when the company reports the financial results of its third fiscal quarter on July 26 after the market close. Let's look at a few things that will be top of mind for shareholders going into the company's earnings report.
Recent results disappoint
In the second quarter, Starbucks reported that revenue jumped 14% year over year to a record $6.0 billion, while earnings per share increased by 4.4% over the prior-year quarter. Unfortunately, growth in comparable store sales globally was tepid, at just 2% year over year, although comps in China increased by 4%. The 2% global comp sales increase was driven by a 3% improvement in the average ticket, while foot traffic fell by 1%.
The company laid out several initiatives to ramp up its growth: expanding its digital relationships with customers, achieving long-term growth in China, growing its super-premium Starbucks Reserve Roasteries, and streamlining its core business. Starbucks will also be focusing its efforts on occasional customers and increasing sales during the slower afternoon hours.
The best-laid plans
Starbucks previously indicated that it was targeting 3% to 5% comp growth for the full year, producing GAAP earnings in a range of $3.32 to $3.36 per share. The company has since lowered that guidance to a range of $3.23 to $3.26. Starbucks said that its third quarter results would be hurt by the closing of more than 8,000 company-owned stores in the U.S. on May 29 to conduct racial bias training.
An uncharacteristic warning
Last month, in conjunction with an investor conference, Starbucks made several pre-earnings announcements of interest to investors. The company now anticipates just a 1% year-over-year global comp sales increase for the third quarter, far below its previous target. It also plans to close 150 underperforming stores in densely-penetrated markets in the U.S. in 2019, much higher than the historical average of 50 closings annually. Starbucks will be focusing future store openings on underpenetrated markets.
It isn't all doom and gloom, however. The company sought to soften the blow of this announcement by saying that it will return more cash to shareholders. It now expects to return $25 billion in the form of dividends and buybacks through fiscal 2020: $10 billion more than the $15 billion target it announced back in November. Starbucks is also increasing its quarterly dividend by 20% to $0.36 per share, its eighth such annual increase.
Starbucks is also making progress in its Global Coffee Alliance with Nestle (NASDAQOTH:NSRGY). Back in May, the companies announced that Nestle would pay $7.15 billion for the rights to market and sell Starbucks' consumer packaged coffees and teas globally, as well as paying Starbucks a percentage of whatever it sells.
Finally, Starbucks will look to reduce its general and administrative costs, and has hired a consultant to help achieve that goal. Expect to hear more details on this during the quarterly presentation.
It's all about the growth
The biggest question going into Starbucks' earnings report will be how the company is progressing on its plans to accelerate its growth, particularly in light of three successive quarters of failing to meet its own guidance. It will likely be several more quarters before we know for sure if the company's plans are succeeding, but perhaps we'll see the beginnings of a turnaround soon.