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3 Big Takeaways From Starbucks' Earnings Report

By Demitri Kalogeropoulos - Jan 29, 2021 at 6:39AM

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The profit rebound is still several quarters away.

Starbucks (SBUX 3.87%) is one step closer to the growth rebound that investors have been waiting for since mid-2020. The coffee giant on Tuesday announced that sales returned to positive territory in China during the fiscal first quarter, while declines were cut in half in the core U.S. segment. Together, these trends kept Starbucks on pace to log as much as a 23% growth spike for the full year.

Let's dive right in.

A woman looks at her coffee cup.

Image source: Getty Images.

1. Progress where it counts

Starbucks is a global business, but the U.S. and China account for most of its annual earnings and growth. Both markets notched big improvements in the quarter that ended in late December 2020. China grew 5% after declining 3% in the prior period, and the U.S. segment's drop lessened to 5% from 9%. Both areas benefited from soaring average spending while customer traffic was depressed by COVID-19.

The results matched up with management's optimistic outlook from late October, even if investors might have been hoping for another surprising acceleration. Instead, Starbucks met executives' targets. "I am very pleased with our start to fiscal 2021," CEO Kevin Johnson said in a press release, "with meaningful improvements in quarterly financial results despite ongoing business disruption from the pandemic."

2. More profit pain

Starbucks warned investors to expect a lag between its sales rebound and its profit recovery, but it was still jarring to see the earnings pressure show up in its holiday results. Operating margin dove to 13.5% of sales from 17.2% a year ago, mainly thanks to lower revenue and extra costs associated with COVID-19 safety.

SBUX Operating Income (TTM) Chart

SBUX Operating Income (TTM) data by YCharts

Starbucks' operating income fell 26% to $813 million, and earnings landed at $0.61 per share compared to $0.74 per share last year, slightly outperforming most investors' expectations. The company still generated ample cash to cover its dividend payment and continue its plans to open roughly 1,100 new stores around the world in fiscal 2021.

3. Doubling Q2 sales in China

If there's a silver lining to the COVID-19 disruption, it's that Starbucks is now entering an especially easy comparison to the prior-year period that was wracked by the pandemic. Executives project that comps will soar 100% in China in the second quarter, mainly because a year ago those metrics plunged by 50% during the initial lockdown phase from the virus. The U.S. segment should return to growth in the coming weeks after declining for nearly an entire year.

Stepping back, Johnson and his team still see global comps rising by 18% to 23% in 2021, with additional revenue gains coming from the growing store base. "We remain optimistic about our outlook for fiscal 2021," the CEO said. The recovery looks like a roughly two-year process, with sales climbing this year as earnings bounce back in fiscal 2022.

The best news is that while investors have recently had to settle for improving results on a quarter-to-quarter basis, Starbucks is now primed to start showing year-over-year gains again, with an eye toward setting new sales records as early as late fiscal 2021.

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