When Starbucks (SBUX -1.02%) reported its second-quarter earnings in April, the company delivered solid results nearly across the board. Most importantly, the company that's done more than any other to make coffee a globally accepted beverage showed investors it still has room to grow. Moreover, it delivered solid traffic results and same-store-sales growth, while gaining operating leverage to push earnings higher.
With earnings around the corner again, let's take a closer look at what investors should be looking for when Starbucks releases its results on July 25.
Image source: Getty Images.
How's China doing?
North America -- and the U.S. in particular -- is still Starbucks' biggest and most profitable market. And that's not going to change overnight. But with that said, there's no single market more important to Starbucks' long-term prospects than China. When we last heard from the company, it was facing strong, and probably increasing, competition in that country, as other companies race to take more share of the country's growing number of coffee drinkers.
Last quarter, Starbucks reported 3% comps growth in the country, a strong move in the right direction, after declining comps the prior quarter under pressure from both new market entrants, and from the company's own hyperaggressive plan to open 600 new stores per year in the country.
What should investors expect? Without getting too focused on specific numbers, it would be good to see continued positive comps, both in sales and in order count, along with continuing to open stores at the same rate previously targeted.
North American growth
Over the past few years, a big part of the Starbucks story has been slowing growth in the U.S., particularly its comps result. The good news is the company has been able to boost comps a bit in recent quarters, with the number coming in at 4% last quarter, double the rate in the year-ago period and solidly above most of 2018's comp result.
However, if there's one aspect of Starbucks' North American comp result that has remained stubbornly unchanged, it's traffic. Last quarter, the company once again reported no growth in comparable transactions, meaning essentially all of its comparable sales growth was the result of higher prices and customer purchases of more items per ticket.
Sure, those metrics are positive; customers' willingness to spend more and to buy more items is indicative of Starbucks' "stickiness" as a brand and product. But it sure would be nice to see the company deliver a smidgen of traffic growth at some point. Customers probably won't be willing to increase their spend at double the rate of inflation each year forever.
Delivering on operating improvements
One of the great things about a business like Starbucks is that increased sales can generate outsize profit gains. In short, the company gains operating leverage at a certain scale, where incremental sales are worth more in profits because they don't increase total expenses as much.
In 2018, the company announced several initiatives to improve its operating leverage even further, including leveraging technology to free up employees to spend more time on customer-facing activities, make it easier and quicker for customers to place and get their orders, and shift certain store activities outside store operating hours to further boost productivity.
In all, the company expects these items will increase throughput during peak hours, drive down costs, and improve the customer experience. Several quarters into this initiative, as well as the company's ongoing digital technology rollouts, look for an update on how these actions are affecting the company's bottom line.
What to expect
Last year, Starbucks earned $0.62 per share on an adjusted basis, and Wall Street analysts are looking for $0.72 per share this time around, good for about 16% higher profits.
Starbucks itself doesn't give quarterly earnings guidance, but after last quarter, management did slightly raise full-year expectations for earnings and margins as the early result of many of its streamlining initiatives start to pay off. Tune back in for a closer look at what we learn after Starbucks reports on the 25th.
