Starbucks Corporation Earnings: A Record Quarter, but a Few Things to Keep Watching

By Markets Fool.com

Starbucks Corporation just released its first-quarter financial results, and it's another record quarter. The highlights:

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  • Total sales increased 13% to $4.8 billion.
  • Comparable-store sales grew 5%.
  • Comparable-store transactions increased by nearly 12 million.
  • 3 million were shares repurchased, and 13 million more remain authorized for buyback.

As CEO Howard Schultz said in the release, Starbucks' performance was exceptional by just about every measure. Let's take a closer look at a few specifics, both good and, if not bad, then at least worth keeping an eye on.

Good: Transaction growth in the U.S. indicates that daypart expansion is paying off
Some analysts were predicting that the company's comp growth in the U.S. would begin losing momentum, but another quarter of 5% comparable-store sales growth tells another story. Nine million of those new comparable transactions happened in the U.S., and though the initial release doesn't tell us much, there's a good chance that some of the transaction growth is the result of efforts to expand business during non-breakfast hours. In 2014, the company did about half of its business before 11 a.m., versus the industry average for quick-service restaurants of only about 15% of total sales at breakfast.

While Starbucks will remain a largely morning business, strengthening its offerings through all parts of the day has been a big focus for the past few years. It sounds like the efforts are paying off.

Good: International expansion is ramping up
The China-Asia Pacific, or CAP, region is a serious source of growth. Comparable sales rose 8% in the region, a strong result showing the power of Starbucks' appeal in that market. The ongoing acquisition of Starbucks Japan -- the acquisition is happening in parts and will be completed in the first half of the year -- led revenue to grow a whopping 86%. The number sounds bigger than it is, as the company only recognized certain licensing and supplier revenues from Starbucks Japan when it was an independent company. Now, those revenues flow through Starbucks -- at least the 79% that Starbucks officially owned in Q1.

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Over the past 12 months, the company has opened almost 800 new stores in the region, a significant driver of growth that will continue in 2015. Another 850 new stores in CAP are planned for 2015.

Worth watching: Starbucks Japan's operating margins are an issue
Operating margin in CAP declined a whopping amount in the quarter, from almost 31%, to 21.8%. While the new revenue led to 34% growth in operating income, Management must begin taking steps to drive operating expense down for Starbucks Japan. It may not be realistic to expect 30%-plus operating margins, but mid-20% performance, similar to what the Americas segment produces should be attainable.

Worth watching: What will happen when Schultz steps down?
CFO Troy Alstead's "sabbatical" is scheduled to begin in March. Alstead, a 23-year veteran of the company, has been viewed as a potential replacement for CEO Howard Schultz, but the uncertainty around Alstead's leave has created unnecessary uncertainty about the company's leadership future. As long as Schultz is at the helm, it's not a concern, but Alstead's role and who his replacement will be are worth watching. I wouldn't call it a "buy or sell" decision based on who replaces him, or his future with the company, but a complex and growing company like Starbucks requires competent and dedicated financial and operational leaders.

Looking ahead
As I write this, the stock is up about 4% in after-hours trading. That may or may not last when the market opens tomorrow, but either way it really doesn't matter. Starbucks' leadership continues to drive a company that's reaching its growth goals, and if that continues over the next five years or more, the short-term movement of the stock on earnings day won't really mean much. If the company fails to execute, the same thing applies. Keep an eye on the long-term results, not the short-term ups and downs.

The article Starbucks Corporation Earnings: A Record Quarter, but a Few Things to Keep Watching originally appeared on Fool.com.

Jason Hall owns shares of Apple and Starbucks. The Motley Fool recommends and owns shares of Apple and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.