It's been an interesting quarter for Starbucks Corporation (NASDAQ:SBUX) shareholders. We've had the excitement of the company's first stock split in a decade, the "Race Together" campaign that was both lauded and vilified, the appointment of a new chief operating officer, and a big deal to further expand Starbucks' business in China. This all following record-setting sales results in its fiscal first quarter.
With the company set to announce earnings for the second quarter on April 23, let's look at both what to expect and the effects that the things I've mentioned will have on the company's prospects.
Same pizza, more slices
When Starbucks split its stock on April 8, it was big news, considering it was the first time in a decade the company had split its stock, though it was the sixth time in its history. The thing is, a stock split doesn't really do much materially for any company. It's the equivalent of cutting a pizza into twice as many slices: It's still just as much pizza as before.
However, CFO Scott Maw did say the move would "modestly increase" the company's earnings guidance for the quarter. The only benefit I can think of for the company in this regard? Shares issued for employee compensation. Starbucks has a relatively broad employee stock grant program that includes both part- and full-time hourly employees. Beyond reducing the financial impact of the company's stock equity reward program for future grants, there's not really any material benefit to splitting the share count.
New leadership part of a bigger plan?
When it was announced that 23-year veteran and longtime COO Troy Alstead was taking a "sabbatical," there was some reason to be concerned. He served (through March 1) in a critical role, heading up operations for a company with thousands of locations in dozens of countries -- not to mention the integration of acquisitions such as Teavana, La Boulange, and, more recently, the major acquisition of Starbucks Japan.
Furthermore, Alstead had been widely considered a potential replacement for Howard Schultz. The CEO is going strong, but investors still fret over the thought of his eventual retirement, remembering the struggling company that he took back over in 2008, after stepping down in 2000 to see two CEOs come and go. Having someone like Kevin Johnson -- the former CEO of networking equipment maker Juniper Networks and a Microsoft allum -- join the management team could be the sign of a longer-term plan for the company.
However, it's more than likely that the plan has a lot more to do with the importance of technology than it does about the potential for Johnson to be Schultz's successor. Furthermore, Alstead's leave is part of the "Starbucks Coffee Break" program, which allows employees to take up to one year off, unpaid, and return to the company. With this in mind, there's every reason to expect him to return to the company in some executive capacity in the near future. Schultz made it clear that his leave was not related to health or job performance, and Alstead's comments on the matter sound like a man who's returning.
Asia as a key growth market
Starbucks' major acquisition of its 1,000 Japanese stores from a franchisor last year marked a major investment in company-owned stores in the region in an effort to re-establish growth as well as improve profitability of this market. The company opened 800 new stores in Asia last year, nearly half of all new stores for the entire company. Any way you slice it, Asia is expected to drive much of the company's growth over the next decade.
The company took another major step in China recently, signing a deal with Tingyi Holding Corp., a Chinese packaged-food and beverage maker, to make and distribute Starbucks-branded beverages in China. The ready-to-drink -- or RTD -- coffee and energy beverage market in China is estimated at $6 billion per year, and it's projected to grow 20% over the next three years.
Starbucks' RTD products are already widely available in some 6,000 Chinese retail locations, so this agreement will probably simply expand on that presence and help the company grow its business in this quickly expanding market.
Starbucks' recent announcement that it will begin pilot-testing deliveries generated a lot of excitement. In a way, this is an extension of the company's efforts to expand its "dayparts" by offering other non-coffee beverages, such as wine and beer in the evenings, as well as expanding and improving its food selections. While not likely to ever be a major contributor to sales, when combined with the many other small additions, these incremental moves can really add up.
To start, the delivery program will be available only in limited Seattle and New York City locations, but it could be rolled out nationwide as soon as next year.
The bigger picture
Starbucks investors can understandably be worried about Schultz's potential replacement, but he won't even turn 62 until this summer. Furthermore, it looks as if Kevin Johnson's value to the company extends beyond his potential as a replacement for Schultz, especially considering there are better than even odds that Troy Alstead returns.
As to earnings on the 23rd, the big picture still points at Asia as the biggest driver for growth, with efforts to expand dayparts in the U.S. and other beverages such as tea coming in a close second. There will be some hiccups along the way, and it's possible that poor economic environments in Japan and Europe will have some negative impact, but investors would be wise to keep the bigger picture and the long-term execution on the company's growth strategy at the front of their minds.