For Starbucks (SBUX -1.02%), business is much stronger today than it was before the pandemic struck in early 2020. Sales are setting new records, and profit margins are expanding, the coffee giant announced in its fiscal third-quarter earnings report before raising its short-term outlook.
There could be more good news in store for shareholders now that the chain has established its leadership position during economic-reopening booms. CEO Kevin Johnson and his team discussed that bright growth outlook July 27 in a conference call with Wall Street analysts while cautioning about major risks ahead including new COVID-19 outbreaks and intense price inflation.
Below, we'll look at a few highlights from that presentation.
Image source: Getty Images.
1. Growth is "incredible."
Starbucks' third-quarter results were impressive beyond just the head-turning 78% sales spike it reported. Investors were expecting a big rebound compared to a year earlier when most of the global store base was temporarily closed to cafe traffic.
But the sales bounce was better than executives had predicted, and it powered an emphatic return to revenue records. Comparable-store sales are up 10% compared to 2019.
Management has said its long-term comps target is between 4% and 5% each year, but the chain is beating that goal even through the pandemic. "The reopening of markets is translating to incredible increases in demand for Starbucks as people are again on the go, reconnecting and socializing with one another," Johnson said.
2. China and consumer retailing
If you've been following just the core U.S. market, then you're missing two major parts of Starbucks' growth story. China is contributing huge sales gains and has a long runway ahead. Sales are up 23% in the past two years, and the company will add 600 new stores this year in China to near the 6,000 mark. It has over twice that total in the U.S. today.
And the chain's retail partnerships -- which sell Starbucks home-brewing and ready-to-drink products at supermarket chains, big-box stores, and other retailers -- are winning, too. Despite intense competition, it was the leading at-home coffee brand, and it gained market share in the third quarter.
Executives said they attribute the recent success to "the power of the Starbucks brand, the bold innovation that attracts new coffee lovers into our categories, and the caliber of our strategic business partners."
3. The best is yet to come
Johnson made a bold claim betting that his company will see many more years of market-thumping performance. "This quarter represents the beginning of a multiyear tailwind for Starbucks," he said.
The chain hangs that bright outlook on three factors: nearly double-digit annual growth expected for the coffee industry, a tilt in demand toward the premium niche that Starbucks dominates, and the chain's proven ability to differentiate itself through new drink platforms and a great shopping experience.
Each of these factors played a role in this past quarter's strong sales growth and increasing profit margins and cash flow. It's just the beginning, though, if you believe the management team. "The combination is a powerful trifecta that provides our business with a multiyear tailwind," Johnson said.
