Coffee giant Starbucks Corporation (NASDAQ:SBUX) is growing like crazy. The company's guidance is for full-year revenue to grow 16%-18%, which is in line with the sales growth the company reported in the first three quarters of the year.
One concern, though, is Asia -- especially China. Starbucks is opening more stores in this key market than any other and is counting on having the majority of its growth over the next decade come from this part of the world. But with big signs that Chinese growth is stalling, is there reason to worry about Starbucks' prospects?
Starbucks reports earnings for fiscal 2015 and the fourth quarter on Oct. 29. Let's take a closer look at what investors should watch for.
A slowing Chinese economy may not be a problem for Starbucks
There's certainly risk here, but there's another major American brand with huge growth ambitions in the Middle Kingdom: Apple (NASDAQ:AAPL). On the surface it may seem bizarre to compare a tech giant to a coffee company, but at their core, both companies are consumer lifestyle brands as much as tech and beverage leaders.
And Apple just reported a stellar quarter in China. Revenue doubled to $12.5 billion in the country from the prior year's quarter, and not just because of the new iPhone. App Store sales in China increased 127% as well. And while Apple may not be a perfect comp for Starbucks, it's a starting point in terms of comparing two companies that are largely viewed as being somewhere between luxury and discretionary.
And looking at Starbucks' own results in China/Asia Pacific -- the region it calls "CAP" -- it seems that a precipitous drop in sales is unlikely. Over the past three quarters, same-store sales in CAP have increased by 8%, 12%, and 11%, with increased traffic, not price increases, accounting for almost all of the growth.
The bottom line: Even if China's macroeconomic worries do start to affect Starbucks' results there, they are likely to be cyclical in nature. The company will weather the storm and continue expanding there, because the long-term opportunity is just too important to not go after.
Leveraging the right model in each region to maximize operating results
Starbucks has used both company-operated and franchise-owned business models in different parts of the world. The company used licensees to build its large Japanese business, but with growth in that market slowing, and operating results stagnating, Starbucks decided to buy essentially all of the Japanese locations, and they're now part of the company's core operations. In China and EMEA, however, licensed stores make up the vast majority of new locations, as working with local operators has proved to work well in these markets.
With some hiccups, this approach has helped improve operating margins in nearly every market in recent years and therefore has been key to the company's ability to grow operating income and net income at a faster rate than sales. Look for Starbucks to continue this trend.
Leveraging technology to improve results and customer experience
One of the things Starbucks deals with in many of its busiest stores is the crush of traffic at peak times. The company is therefore trying out a number of app-driven ways to improve service, reduce bottlenecks during peak hours, and improve sales. Chances are, the company's just getting started.
So far this year, Starbucks has made two significant hires, starting with COO Kevin Johnson in January. Johnson is a longtime board member and had been CEO of Juniper Networks until 2013, and before that he was an executive at Microsoft. More recently, the company hired Gerri Martin-Flickinger to serve as chief technology officer. Martin-Flickinger comes from Adobe, where she served as CIO.
Expect to hear more on the earnings call about the company's initiatives around things such as mobile ordering, payments, and even delivery.
Final thoughts: keeping the long-term view
Eventually, something will happen somewhere in the world that will slow Starbucks' incredible growth rate. Frankly, it's nearly impossible to predict what will happen, or when or where.
So it's probably better to keep an eye on the company's fundamentals, such as operating margins, cash flows, and the balance sheet, versus trying to outguess the global economy or Mr. Market. There will be a rough patch at some point. But as long as Starbucks' management continues to focus on operating excellence, technology to leverage better results, and a great customer experience, the short-term impact of the unpredictable things won't harm things in the long run.
If anything, those kinds of events can create buying opportunities for savvy investors.