Seven years ago, coffee giant Starbucks Corporation (NASDAQ:SBUX)’s future looked grim. Bearish critics claimed that its market was saturated and that its best days were behind it. Between 2006 and 2008, the company’s margins crumbled, its earnings plunged, and its share price bottomed out at around $8 per share.
However, founder and former CEO Howard Schultz returned in early 2008, and his forward thinking plans for future growth paid off. Back in 2008, Schultz outlined his four primary strategies in rebuilding the brand he created – improving its domestic business, rebuilding an “emotional attachment” with customers, expanding with long-term goals in mind, and increasing its global presence into untapped markets.
Over the following five years, Schultz was successful at achieving those goals, silencing the critics who claimed that Starbucks Corporation (NASDAQ:SBUX)’s days of explosive growth were over. The company’s recently reported third quarter earnings, which Schultz called the “best across-the-board third-quarter performance in our 42-year history,” was a strong indication that the company’s best days might still be ahead of it.
The best third quarter in history
During its third quarter, Starbucks Corporation (NASDAQ:SBUX) earned an adjusted $0.55 per share, up from the $0.44 it posted in the prior year quarter. Revenue climbed 13% year-on-year to $3.74 billion, as same-store sales rose 8% globally. Starbucks Corporation (NASDAQ:SBUX) reported 9% same-store sales growth in the Americas, 9% growth in China and the Asia-Pacific region, and 2% growth in the EMEA (Europe, Middle East and Africa) region. Operating margin also increased from 14.9% to 16.4%, thanks to higher-priced drinks and lower coffee bean prices.
Starbucks Corporation (NASDAQ:SBUX)’s robust same-store sales growth in China surprised some analysts, who had expected the country’s economic slowdown to take a toll on discretionary spending. Others had feared that Starbucks Corporation (NASDAQ:SBUX)’s aggressive expansion into Asia would lead to disappointing sales, since Starbucks’ coffee is still priced $3 to $6 globally – which is considered quite expensive in emerging economies. It turns out that neither concern was justified, and a growing middle class in urban areas continued fueling demand for Starbucks’ drinks.
The company is expanding heavily into China and Southeast Asia, and has focused on boosting its store count in Indonesia, Malaysia and the Philippines, which Schultz considers valuable growth markets. During the quarter, Starbucks opened 341 new locations worldwide, a big jump from the 231 stores it added in the prior year quarter, bringing its total global store count to 19,209.
Crushing the competition
Starbucks’ improvement across all global regions was a stark contrast to McDonald’s Corporation (NYSE:MCD), which recently reported global same-store sales growth of 1% due to sluggish demand in Europe and Asia. Over the past decade, McDonald’s Corporation (NYSE:MCD) has steadily expanded its McCafé line of beverages and desserts with three main goals in mind: to compete with Starbucks, increase afternoon sales traffic, and balance out rising commodity prices. McCafé’s cheaper fare can be considered a threat to Starbucks’ core products, but the two companies still occupy two different markets, as seen in Starbucks’ strong third quarter earnings.