The last few quarters have included some painful resets of shareholders' growth expectations for Starbucks (SBUX 0.59%). First, the coffee titan missed its operating targets last year after its holiday season merchandising plan failed to meet management's goals.
Starbucks then kicked off fiscal 2018 by saying it might end up at the low end of its reduced annual growth forecast. That tough news was followed by another warning in June that predicted nearly flat comp sales results in the fiscal third quarter.
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Starbucks executives said at the time that they are taking "decisive steps" aimed at addressing these issues. Investors are hoping to see concrete improvements in the chain's upcoming earnings report, slated for Thursday, July 26.
Let's take a closer look.
Growth in China and the U.S.
Management boasted last year that Starbucks has two major regional growth engines, now that China has joined the U.S. as a key profit driver for the company. The problem is that each of these segments is facing major challenges today.
Sales growth has hit a wall in China. The company warned last month that comps in that key market would be flat to down modestly in the third quarter of fiscal 2018, compared to increases of 4% in Q2 and 6% in Q1. Executives said there are a few drivers behind that shift. The biggest is the fact that Starbucks' delivery service in China has been hampered by a reliance on several third-party providers. That's why the chain is looking to partner with a single Chinese company that can provide consistent, high-quality deliveries. Investors can expect to hear more about this project on Thursday.
The U.S. segment has its own challenges that boil down to shifting consumer tastes. Starbucks' Frappuccino business underperformed in the most recent quarter, for example, as coffee fans opted for healthier drinks with lower sugar content.
The answer to this problem is a faster pace of on-trend product launches, and investors can expect to see much more news on this score in the coming months. "... [W]e have an opportunity to be more agile innovators," CEO Kevin Johnson told investors in June, "and do much more around healthier, better for you beverages ..."
Cost cuts and returns
Earnings growth gets harder to secure as sales gains slow to a crawl. That's the reason why Starbucks is launching several aggressive profit-boosting initiatives. The chain started cutting costs a few quarters back and sped that process up after a mix shift towards food started eating into its profit margin. But management promised back in June to supercharge the restructuring process through deeper cost cuts and a new plan to close underperforming stores in its most densely populated markets. The company is even considering "strategic options" that might entail selling off large chunks of company-owned locations to licensees. We will get more details on these projects on Thursday.
Starbucks is using a big portion of the savings it is generating to return more cash to shareholders. It surprised investors last month with a 20% dividend hike. The company also raised its target for stock buybacks. Together, these shifts mean that Starbucks will return about $25 billion to shareholders over the next three fiscal years, or $10 billion more than the initial target announced in late 2017.
The path forward
Starbucks shareholders will be happy to see extra cash flowing into their accounts, but the capital returns won't be as valuable if they aren't paired with a sales growth rebound. Management is still looking for ways to spark that recovery, so investors will rightly focus on Starbucks' plan for breaking out of its global sales growth funk on Thursday.
