What to Focus on When Starbucks Corporation Reports Earnings

Image source: shinji_w under Creative Commons license.

Investor interest in Starbucks Corporation (SBUX 0.53%) has rarely been so high. The company's ability to deliver strong earnings quarter after quarter, and its increasingly market-leading technological retail innovation, provide but two reasons the "SBUX" ticker has soared 53% year to date. There will be much to absorb when the company releases fiscal fourth-quarter 2015 earnings on Thursday. Below, let's look at five essential items investors should pay attention to.

Will Starbucks bookend global comparable sales?
As with every Starbucks earnings report, global comparable-store sales will be the first number most analysts and investors alight on. The company has strung together 22 straight quarters of at least 5% global comps growth. For better or for worse, quarterly revenue expansion is now typically filtered through a preliminary question upon each earnings issuance: Did the streak continue? 

This year, Starbucks created a bookend early on with its global comps gain of 5% in Q1 2015, the same result as the prior sequential quarter (Q4 2014). In the following two quarters, global comps gained steam, hitting 7% in both Q2 and Q3, on the strength of healthy advances in the Americas segment as well as China/Asia Pacific, or CAP.

While this time last year investors simply hoped that Starbucks would hit the magical 5% increase in global comps, expectations are likely raised by the fine performance of the last two quarters.

Longer-term investors should be fine if the company simply sets another 5% book-end after the two vigorous middle quarters of this year, regardless of how the herd interprets the comps number. For the record, management is forecasting mid-single-digit global comps growth for the entire year (i.e., 5%-7%).

Look for "color" on food offerings
With each passing quarter, food service purchases increase relative to coffee in Starbucks' average customer transaction basket. The company has heavily promoted savory breakfast options, and sandwiches during other key dayparts, this fiscal year. Any color or commentary on food and related daypart growth will probably be covered during management's earnings call with analysts on Thursday. In anticipation, investors can look to two benchmarks: Breakfast sandwich sales in the U.S. rose 30% last quarter, and lunch food offerings climbed 20%. 

China and CAP: Early warning signs may appear
The devaluation of the Chinese yuan this summer, along with turmoil in China's stock market, not to mention a deceleration in the country's economy, have introduced uncertainty into expectations for the average Chinese consumer's purchasing power and confidence. I discussed potential implications for Starbucks in a recent article, which you can read here.

China and the CAP segment as a whole are vital to Starbucks' future expansion. CAP is the coffee giant's second-largest segment, contributing 17% of company revenue and 14% of operating income through the first three quarters of this fiscal year.

At a recent analyst conference held on Sept. 10, CFO Scott Maw noted that through August (that is, two-thirds of the way through the fourth quarter), the company had not seen any material effect on transactions from economic uncertainty in China.

However, it's possible we're only at the beginning of a phase of Chinese consumer caution. Early signs from September transactions would potentially manifest as a drop-off of 2 to 3 percentage points from CAP's impressive second- and third-quarter comp gains of 12% and 11%, respectively.

Mobile Order & Pay and the effect on "My Starbucks" account loads
Originally scheduled for a complete rollout by the end of this calendar year, Starbucks' mobile "order ahead" app proved so successful that the organization expedited its full launch within company-owned U.S. stores, completing the initiative last month.

Mobile Order & Pay provides a myriad of advantages for both Starbucks and its customers. Perhaps the greatest financial gains for the corporation over the long term will arise from increased throughput in stores and the opportunity to add incremental sales.

If management indicates that Mobile Order & Pay positively affected revenue during the quarter, I'll be looking closely at the $1.0 billion "Stored Value Liability Card" account on the company's balance sheet when Starbucks' formal quarterly filing is issued.

This account represents monies collected by Starbucks as customers load up their "My Starbucks" card and app balances. A slowdown in the rate at which this account has been growing may indicate that use of Mobile Order & Pay is leading to higher customer spends due to increased visits, larger order sizes (as a result of the app's convenience), or both.

Sizing up the dynamo segment
For those with a long investment horizon, reviewing a Starbucks quarter isn't complete without checking in on the organization's unsung hero, the segment called channel development. This business is primarily concerned with packaged goods, including coffee beans, bottled drinks, and K-cups. Channel development is by far Starbucks' most profitable segment, generating $0.36 of operating income for every dollar of sales. Year to date, channel development has expanded its top line at a rapid rate of 11.5%.

As a consequence, the quarterly operating profit of channel development is now nearly equal to that of the mighty China/Asia Pacific segment. Investors should look for continued fast revenue expansion and a maintenance of operating margin in this segment during the fiscal year's final quarter. It may house a boring story line against global comps or digitally enabled revenue, but channel development is beginning to play a core role in Starbucks' ongoing success.