Starbucks Earnings Preview: Can It Execute on These 3 Things?

Starbucks' growth in the coming years is about more than just coffee. Source: Teavana.

It's hard to fathom, but at more than 20,500 stores and $16 billion in annual sales, Starbucks  (NASDAQ: SBUX  ) still considers itself a growth company. Considering that it has grown net revenues about 12% per year over the past five years -- a rate that doubles sales every six years -- it's probably not a stretch to think that it just might be.

However, a company already this large has to work a lot harder -- and smarter -- to keep up the growth rate. With earnings for the fourth quarter and full year set to release on Thursday, Oct. 30, what can investors expect? Well, with the global economy still in a bit of a funk in many places, it's a little tough to know exactly what to expect. However, the short-term results are less important than progress on the long-term goals. Here are three things we will get an update on in the earnings release and conference call that probably matter the most for the long term.

1. All about Asia 

Starbucks employees at a company event. Source: Starbucks.

Management made it pretty clear how important Asian expansion is when it acquired the remaining stake in Starbucks Japan about a month ago, bringing the current 1,000-plus stores there under company control, and smoothing the path for forward growth. Furthermore, the company's pace of store expansion in all of Asia is outpacing all other markets. Last quarter, the company announced that it had opened 160 new stores in Asia, 34% more than a year ago, and 11 more than it opened in the Americas. As a comparison, the Europe, Middle East, and Africa region -- called EMEA -- combined for a net 37 new stores opened last quarter. 

Part of the reason in the divergence between Asia and EMEA can be seen the historical results. Starbucks' stores in Europe have historically performed worse than other markets, as reflected in the most recent comps growth of 3%, less than half that of the consolidated business. Furthermore, the CAP region has carried historically strong margins and operating income versus EMEA. 

It's also a market with huge room to grow, based on current store counts:

Source: Starbucks 2013 annual report.

China and India alone have more than 2 billion residents combined and will be the home to hundreds of millions of new members of the middle class over the next decade or so, and the company's only presence in India so far is limited to a single joint venture, while China has over 1,000 stores. Look for further clarity on Starbucks' expansion plans for Asia in 2015: This market should become the company's second-largest next year, on the back of an expected 750 new stores opened in 2014, and 800 in 2015.

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2. Americas growth; EMEA stabilization

Typical scene at a Starbucks. Source: Texas A&M, Corpus Christi.

Of the 13,000-plus stores in the Americas, almost all of them are in North America, except for 70 company-owned stores in Brazil, and 207 listed as "other" in the 2014 annual report. CFO Scott Maw announced that the company will open 650 stores in the Americas on the Q3 earnings call, but we will probably get updated guidance on that this week. 

How much of that growth will take place in the U.S. versus further into Latin America? Frankly, this is a relatively untapped market outside of Brazil and Mexico. Either way you look at it, it's pretty clear that with comps still in the high single digits, this market is not yet mature. Again, as with the PAC region, I'm looking for more detail on Starbucks' expansion plans in the region. 

Additionally, and just as important, is seeing further stabilization of the business in Europe. Comps of 3% aren't good, frankly, but it's important to consider that much of Europe has yet to fully recover from the recession. In the Q3 earnings call, management did state that comps in the U.K. and Germany -- easily the two strongest economies in Europe -- were better than the rest of EMEA, which bodes well. Furthermore, both margins and operating income were drastically better last quarter than the year-ago period. Ideally, this trend will continue this quarter. 

3. All the other stuff

Source: Starbucks.

Remember when you used to go to Starbucks to drink coffee?

Starbucks has introduced a lot of new products to its stores over the past several years, ranging from new food options to non-coffee beverage choices. For the most part, management has done a pretty solid job of integrating these things into the Starbucks experience, enhancing it without changing it. It is important that the company continues to execute on that strategy going forward. 

I think a big part of the growth in China and India, and even here in the Americas, will be how well it is able to expand its alternatives, especially teas. Currently, there are more than 300 Teavana stores, but it's important to remember that Teavana sells teas but isn't a place to go to drink tea, like Starbucks is a place to drink coffee and socialize, relax, or work. As Starbucks expands its business overseas into traditional tea cultures, it will be interesting to see how much emphasis is put on offering teas and other beverages besides its famous coffee drinks. 

The bigger-picture question: Can management successfully integrate so much stuff in international markets as it has in North America? That will matter as time passes, because it will need to keep pulling these levers for future growth. 

Focus on the big picture
While it's clearly important that Starbucks continues to be an excellent operator, the bigger-picture concern, to me, is seeing the company continue to execute on its growth initiatives. Those initiatives are about more than just building more stores -- they also include how well the company can leverage all of its product offerings to drive profitable growth in the coming years. 

Starbucks is already huge, but there's room to keep growing, if management can keep making the right calls. 

 

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