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Starbucks Aims to Take Positive Momentum Into a New Fiscal Year

By Demitri Kalogeropoulos - Jan 24, 2020 at 9:55AM

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The coffee titan is set to announce its latest operating results in just a few days.

Starbucks (SBUX 2.98%) is back in growth mode. The coffee titan in late October posted impressive results for its fiscal 2019 year that marked a sharp turnaround following two consecutive years of underperformance.

That success has raised expectations for the new fiscal year and Starbucks will report on its first quarter on Tuesday, Jan. 28. Below, I'll take a look at a few trends to keep an eye on when that report is released.

A coffee cup and coffee beans spread out on a table.

Image source: Getty Images.

How things have been going

It was just over a year ago that Starbucks' business began to turn the corner, and that positive momentum carried through for the entire 2019 year. Comparable-store sales trends improved in both of its core growth markets, the U.S. and China, culminating in a 5% global uptick in the fourth quarter.

That translated into market share growth and shows that CEO Kevin Johnson's rebound plan is working. Investors next  week will be looking for confirmation that the selling environment is still favorable. Those clues will show up in the growth pace in the U.S. and China, which might slow slightly from the prior quarter's 6% and 5% gains, respectively.

Beyond the headline result, keep an eye on customer traffic trends. Starbucks' recent results have featured balance between rising traffic and increased average spending, in contrast with peers like McDonald's, and furthering that streak should support the stock.

Starbucks' stronger results have allowed it to scale up its cash returns to shareholders, with spending on stock repurchases and dividends jumping to $12 billion last year compared with $9 billion in 2018 and $3.5 billion in 2017. However, profitability still hasn't rebounded -- and that's a key missing ingredient in the bullish investing thesis. In fact, operating margin last year slipped to 15.4% of sales from 15.7%. It was nearly 19% in fiscal 2017.

That 2019 decline was mostly driven by temporary issues. Investors will be looking for the restaurant chain to begin marching back toward a percentage operating margin in the high teens, perhaps starting with next week's quarterly report.

A look ahead

Investors started taking Starbucks' rebound seriously around a year ago, and that enthusiasm was supported by the fact that management issued a rare upgrade to its outlook. Executives said at the time that global comps might land at almost 4% for the year, and they went on to expand by 5%.

Starbucks will have another opportunity to update its full-year outlook on Tuesday. Currently, that prediction stands at the same range as it did a year ago, calling for comps of between 3% and 4%. An additional 1,900 new stores, meanwhile, should help lift overall revenue higher by about 7%. Starbucks is also calling for a "modest" uptick in operating margin so that operating income rises by nearly 10%.

Affirming those financial targets on Tuesday would confirm that Starbucks is still expanding quickly, and that it continues to find ways to make its beverages, and its dining experience, stand out from rivals in brutally competitive markets like the U.S. and China.

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