3 Things to Watch When Starbucks Corporation Posts Earnings

By Demitrios Kalogeropoulos Markets Fool.com

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Image source: Getty Images.

Starbucks (NASDAQ: SBUX) will post results for its fiscal first quarter after the market closes on Thursday, Jan. 26. Here's what investors should watch for as the beverage giant kicks off a new fiscal year.

Traffic jam

Starbucks last posted a minor 1% increase in global customer traffic for the trailing 12 months, compared to a 3% boost in the prior period. That decline was entirely responsible for comparable-store sales growth slowing to a 5% pace from 6% or better in each of the prior four fiscal years.

Image source: Starbucks.

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Menu innovations, price increases, and a higher proportion of food sales should all help the chain's average spending climb higher. In fact, that metric is on a long-term upswing, with average ticket growth rising to 3% in 2014 and hitting 4% in each of the following two fiscal years.

However, Starbucks needs to supplement that boost with a higher level of customer transactions to hit its long-term comps growth goals. Last quarter, as the company announced a 1% dip in traffic at U.S. locations, executives implied that it was still a market-beating result. "Starbucks' record Q4 results in the face of ongoing economic, consumer and geopolitical headwinds ... demonstrate the power, relevance and resilience of the Starbucks business and brand," CEO Howard Schultz said in a press release. Nothing would go further to show off that brand relevance than a healthy uptick in customer transactions this time around.

Profitability

The coffee chain believes it can grow annual sales by 10% while boosting earnings by as much as 20% through fiscal 2021. The only way it can achieve that happy result would be through increased profitability.

SBUX Operating Margin (TTM) data by YCharts.

Its recent track record here has been phenomenal. Operating margin rose to 20% of sales last year from 19%, which helped operating income jump 17%.

Starbucks is getting a big assist from its extremely profitable consumer products division that sells ground coffees, teas, and various branded ready-to-drink beverages to retailers like grocery stores and warehouse clubs. In the last complete year, that segment saw sales rise 12% as operating margin soared higher by 4 percentage points, to 42% of sales. It's numbers like these that demonstrate why Starbucks' management team is doing everything it can to expand the channel development unit to more than its current 9% of the overall business.

Store growth

Starbucks already has over 25,000 stores in 75 countries worldwide, but it's still very much a growth story. The company aims to add 12,000 locations over the next five years to expand its base by about 50%.

That works to a slightly faster annual growth pace than the 2,000 new locations Starbucks added over the past 12 months. These included its first entry into the markets of Cambodia, Luxembourg, South Africa, and Slovakia. Yet the biggest growth market by far will be China, which has surged from just 400 stores to over 2,400 in the past five years. Starbucks wants to more than double its current total there by 2021, meaning China should account for nearly one quarter of its total global expansion over the next five years.

In the U.S. segment, investors can expect the company to keep tinkering with small-footprint store formats while pushing drive-through upgrades and mobile ordering and delivery.

Looking ahead

With CEO Shultz stepping out of the leadership role in April, his successor, Chief Operating Officer Kevin Johnson, should be taking over at a time when sales, operating income, and operating margins are all at record highs. Ideally, Johnson will have plenty of opportunity to deliver growth by just continuing the initiatives that have powered market-beating profit gains over the last few fiscal years.

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Demitrios Kalogeropoulos owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.