Starbucks (NASDAQ: SBUX) stock is off to a rocky start in 2017. Shares declined following a first-quarter earnings announcement that raised some big questions about its growth trajectory. Specifically, a customer traffic slowdown could threaten the coffee giant's goal of double-digit revenue gains right as founder Howard Schultz steps away from the Chief Executive role.
Continue Reading Below
With those major risks in mind, here's what investors should look for as Starbucks progresses through its new fiscal year.
Image source: Getty Images.
The biggest question will be around sales growth. Comparable-store sales gains fell to a 3% pace in the U.S. business last quarter from 4% in the prior quarter. That was the main contributor behind a surprise overall comps slowdown to 3% worldwide from 5% over the prior 12 months.
Image source: Starbucks.
There is noise in this metric right now because Starbucks recently shifted its highly successful loyalty program to emphasize spending over transaction volume. As a result, reported customer traffic numbers look smaller while average spending is a bit elevated. Last quarter, for example, transactions fell 2% while spending jumped by 5%. After accounting for the loyalty program shift, customer traffic was flat as average spending rose by 2%.
Many retailers would kill for the 3% global comps Starbucks reported last quarter. However, it's also true that the coffee titan isn't immune to the unfavorable industry trends that have hurt its rivals. Chief Operating Officer Scott Maw described a "challenging environment for restaurant retailers overall" in this past quarter's earnings report as the company lowered its 2017 growth target to 9% from the previous 10% forecast.
There was no change to Starbuck's aggressive expansion plan, which aims to add 12,000 new locations over the next five years to boost its store base by 50% by 2021. That works out to a significantly faster annual pace: 2,400 per year compared to the 2,000 restaurants it opened in 2016.
A huge chunk of that growth will come from just one market: China. Starbucks wants to more than double its total there, which means that country should account for about 25% of its total global expansion over the next five years.
The more mature U.S. segment should grow, too, but it will be less of an all-out land grab. Instead, Starbucks will be emphasizing tweaks like adding drive-thru operations to existing shops and opening up tons of its smaller-footprint concepts.
Starbucks continues to target earnings growth of between 15% and 20% each year through 2021, even though sales should tick up at a slower pace. That puts the pressure on expanding profitability to close the gap.
Its results were mixed on this score last quarter. Operating margin jumped by nearly two percentage points to 21% of sales in the China region and by a full percentage point to 17% in its European division. As usual, the channel development segment was the real standout as profitably soared by more than 6 percentage points to 44% of sales.
But operating margin declined in the core U.S. region, dropping to 24% of sales from 25% as the company increased wages for its baristas. That slump kept a lid on overall profit margin, which ticked up to 19.8% of sales from 19.7% a year ago.
Ultimately, Starbucks began the year slightly below its long-term plan in both the top- and bottom-line metrics. Revenue improved 7% and earnings per share rose 11%. That short-term result is no reason for investors to panic, especially given that the company is outgrowing competitors and has a huge global growth runway ahead. Still, it will be worth investors' time to watch this year's sales and profit trends for signs that the long-run outlook is shifting.
Find out why Starbucks is one of the 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)
Tom and David just revealed their 10 top stock picks for investors to buy right now. Starbucks is on the list -- but there are nine others you may be overlooking.
*Stock Advisor returns as of January 4, 2017.