Commentary

Starbucks Serves Up A Better-Than-Expected Q1 Earnings Report

Starbucks is brewing up a storm -- or, as president and CEO Kevin Johnson more modestly put it in the Q1 Fiscal 2019 report released after the market closed yesterday: “Starbucks delivered solid operating results in the first quarter … as we drive our growth-at-scale agenda with focus and discipline.” 

That means focusing on the bottom line and curtailing some of the more fanciful notions of retired founder Howard Schultz -- who reportedly is contemplating a third-party run for the presidency in 2020 -- had championed.

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“Johnson, who took over from … Schultz nearly two years ago, has taken a more analytical approach to managing Starbucks by doubling down on the chain’s coffee shops and scaling back some of his predecessor’s ambitions. He has turned over most of the company’s consumer products business to Nestlé SA, gotten Starbucks out of tea retailing and curbed plans to build about 1,000 luxury coffee shops under the Reserve brand,” writes  Julie Jargon for the Wall Street Journal.

“‘Our streamline efforts over the past six quarters are paying off by allowing us to bring more focus and discipline to our three strategic priorities,’ Mr. Johnson said, referring to the U.S., China and the partnership with Nestlé that will get more Starbucks-branded packaged coffee in retailers around the world,” Jargon continues.

“Starbucks is working to improve customer service in its U.S. cafes, developing healthier beverages and rolling out delivery across the country,” she adds.

On a call with analysts transcribed by Seeking Alpha, Johnson said that its Starbucks Rewards program “continues to be a powerful enabler of loyalty and we are thoughtfully evolving the program to provide greater choice and flexibility for rewards members. We will enhance the program this spring to enable loyalty customers to earn and redeem more quickly, and redeem those awards across a broader range of items in our stores.”

Look for a “robust marketing activation plan” to drive awareness.

“As we've shared in the past, lack of awareness has historically been one of the limiting [factors] to customer adoption, and we had a significant opportunity to amplify a powerful message around loyalty,” Johnson said.

“But what about the key menu item Starbucks sells, drinks?” asks Zlati Meyer for USA Today.

Well, its holiday season offerings -- which included the new Juniper Latte as well as Peppermint Mocha, Caramel Brulée Latte, Chestnut Praline Latte, Gingerbread Latte, Eggnog Latte and tuxedo-themed Black and White Hot Cocoa, Black and White Mocha and Black and White Frappuccino -- had “positive customer reception,” she reports.

All told, “comparable sales in the U.S. grew at 4% year-over-year to $4.2 billion,” Jacob Sonenshine writes for The Street, and earnings-per-share of 75 cents beat analysts’ estimates of 65 cents. The stock gained 1.71% after slipping by 2.54% in regular hours as a result. “Management guided for revenue growth of between 5% and 7% for the fiscal year of 2019 and global comparable stores growth of between 3% and 4%.”

Sales grew 1% in the country Starbucks calls its “second home market,” China. Although that’s a lot better than Apple is doing there lately, “investors shouldn’t feel excessively comforted,” Bloomberg’s Sarah Halzack writes. For one, startup competitor Luckin Coffee “has been on a tear” and Starbucks is “playing defense.” For another, Starbucks faces challenges in penetrating markets where incomes are not as high as they are in top-tier cities such as Shanghai.

Overall, Johnson’s direction -- and recent results -- have not gone unnoticed by investors.

“Starbucks shares were struggling last summer, beset by concerns that the coffee giant had reached a saturation point and would struggle to grow like it had in the past. But the value of the brand never changed, as recognized by activist investor William Ackman who took a stake in the company last fall. Starbucks has now soared 37% since its June 2018 low,” Alex Eule reports for Barron's.

Meanwhile, in analyzing former CEO Schultz’ prospects as a possible independent candidate for president, CNN’s Arick Wierson and Bill Hillsman write that he’ll have to target independent voters with all the marketing finesse he’s demonstrated over his career at Starbucks.

“As a seasoned retailer, Schultz needs to use his money and his smarts to court independent voters as he would new customers, making them feel empowered by the fact that they don't identify with either dysfunctional major political party. With the right strategy, he should be able to parlay his success in corporate America and in building a beloved brand into a viable political vector,” they observe.

But, they point out, “the biggest wild card in a Schultz independent presidential bid is the candidate himself. Like the current President, this self-made billionaire is untested as a candidate in the political realm.”

Who ever thought people would be wistful for the good ol' days of run-of-the-mill “politics as usual”?

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