Since taking back over at the company in 2008, Starbucks (NASDAQ:SBUX) CEO Howard Schultz has pushed the company to find a lot of ways to grow beyond just opening new stores, including offering better food choices and adding teas, wine, and beer to many locations, in an effort to make Starbucks a place people want to go anytime of the day, and almost anywhere in the world.
Considering the sheer number of initiatives the company has taken on, it's pretty incredible how well it has managed to execute on many of them. But since there are so many, it can be difficult to know what matters the most. With that in mind, here's a look at the three key things you should pay the most attention to when the company reports earnings Thursday.
But first, the news
Starbucks recently announced that it was partnering with The New York Times to provide some free content to Starbucks Rewards customers through the Starbucks app, as well as giving loyalty points, or "stars," to reward customers who subscribe to the Times. This is similar to a deal with streaming music provider Spotify.
Starbucks also recently announced something that's a bit of a black mark against the company, in closing the 23 La Boulange retail bakeries that were part of the 2012 acquisition of that company. The company will continue to use the La Boulange brand, but any hopes of expanding into the retail bakery business were squashed with this move.
Frankly, this move stinks for fans of the bakery in the Bay Area, and it sounds like it was a decision reached when La Boulange founder Pascal Rigo -- who stayed on with Starbucks as a VP after the acquisition -- decided to leave Starbucks. However, in a recent interview, Rigo had nothing bad to say about Starbucks' decision, and even went so far as to say he understands why the company made the move, calling the 23 retail bakeries "a distraction" for a company with more than 21,000 coffee shops. Rigo also said that the quality of the food at Starbucks was improved by the move, and that sales of food items definitely improved in the three years since the acquisition.
The company also announced in June that it was expanding its Mobile Order & Pay feature to 17 more states -- some 3,000-plus stores. This feature lets customers order and pay through a mobile app, saving time and shortening lines at the register.
Starbucks is also putting a bigger emphasis on its Teavana brand internationally, and will begin selling more of its tea brand in Starbucks' international stores. The idea is this will build more brand awareness in addition to taking a bigger share of the massive global tea market, paving the way for global expansion of Teavana branded stores, which sell a wide variety of high-end loose leaf teas.
1. Asia remains biggest growth market
In terms of both raw opportunity and market penetration, Starbucks' China Asia-Pacific, or CAP, segment is hugely important to Starbucks. The company is opening nearly twice as many stores in this market as any other, and this is likely to continue to be the case for years to come. Over the past 12 months, the company has opened more than 700 stores in the region.
Keep an eye on net new store openings, and on operating income and operating margin in this region as well. The company acquired Starbucks Japan late last year, significantly boosting its total revenue and operating income in the region. The acquisition -- which added all of the operating expense of the restaurants to Starbucks' ledger -- dropped operating margin in the region to 18.9% last quarter from almost 33% the year before, but also increased operating income 29%.
It makes sense that operating margin would come down, since the company is now running those stores and not just collecting licensing revenue, but Starbucks Americas regularly sees operating margins above 21%. But since most of the new stores in the region will be licensed stores, operating margins should begin increasing going forward.
Weak economic environments in Japan and China could have some impact on the results, but be sure to keep an eye on what the company can control.
2. Same strategy in EMEA
The company is taking the same approach in its Europe, Middle-East, and Africa segment, using more licensed stores to improve operating margin. The company has struggled for years to find traction in much of this segment, and working with local licensees could be the key to unlocking greater growth in this segment. The risk, of course, is loss of control when using licensees versus operating the stores, but after more than a decade of sub-par growth and weak margins, it's understandable why the company is shifting strategy here. If it works, operating margin and operating income will continue to expand.
3. All the other stuff in The Americas
That subhead may sound really vague, but this segment still accounts for almost 70% of sales, and is also where the company tries out and refines all of its key initiatives like improved foods, new non-coffee beverages, daypart expansion programs like adding beer and wine, and coffee delivery, just to name a handful of more recent moves.
While some don't pan out as expected (cough, closing La Boulange, cough), many do, and it's important that the company remain focused and disciplined on these initiatives in order to continue improving the experience for customers. As important as Asia is for the future of Starbucks, it still grew sales in The Americas 18% and 13% the past two quarters.
In short, Starbucks' execution and results in this segment will drive the company's bottom line for years to come.
Starbucks always has a lot going on, and there are a handful of things that weren't even mentioned in this article. However, while it's important for the company to execute on those initiatives and figure out how they fit in the bigger picture, it really boils down to how they impact the results over time.
Keep an eye on the bigger picture based on the things above, and you'll have a better idea how those initiatives are impacting the company's results.