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With CFO Maw Retiring, What's Next for Starbucks? (SBUX)

Afrasiab Mian
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Starbucks SBUX announced on Thursday that CFO Scott Maw would retire, effective November 30th of this year, and serve in a senior consultant role through March of 2019. Maw, who has been in the CFO role for the last four years, did not offer any explanation as to the timing of the announcement. Considering Maw’s relatively young age and short tenure at the firm, analysts were caught off-guard by the news.

During Maw’s first two years as CFO Starbucks performed very well, with its stock value seeing nearly 73% in growth compared to an industry average of 14.3%. But since then things have slowed down, with the stock seeing a 20.7% decrease in value in from February of 2016 to the present. 

The news comes just weeks after Executive Chairman Howard Schultz, who oversaw the global expansion of the firm, said that he would step down from his position later this month.

The Facts

This slump is largely due to recent sluggishness in comparable store sales numbers. The firm’s Americas segment (accounting for 70% of total revenues) posted 3% comps growth in fiscal 2017, representing a notable decrease from the 6% growth of the previous year. Another concern stems from the company’s announcement earlier this month that it would close 150 poorly performing company-operated stores next year, about three more than its typical annual numbers.

In its Q2 FY18 earnings report, Starbucks reported in-line earnings and exceeded revenue estimates, posting $0.53 in earnings per share on $6.03 billion in revenues. These numbers represent 17.8% and 13.9% year-over-year growth, respectively.

Still, the company’s 490 basis point decrease to 12.8% in GAAP operating margin is a source of concern, as this is not the first decrease in recent memory. However, according to the report, the decrease is part of the firm’s larger “restructuring and impairment charges.” The company is developing a product mix shift largely toward food as well as spending on efforts to streamline business operations.

Plenty of Reason for Optimism

While investor weariness is justified, there are still some shining points for Starbucks. Specifically, the firm is seeing large payoff on its investments in Asia. It continues to see benefits from its $1.4 billion purchase of East China JV at the end of last year. Starbucks initially operated in Eastern China, its most urban and populous region, through a 50-50 joint venture with local franchiser Uni-President group. By the deal’s close, this brought its total number of stores in China to 3,100 (in late December).

As of FY17, the China-Asia-Pacific segment of SBUX’s operations account for only 14% of its total revenues. In its earnings report, it also highlighted a 54% revenue increase in China to nearly $1.2 billion in revenue and the construction of 216 new stores. Being that China’s middle class is set to double from 300 million to 600 million by 2030, there is a significant amount of earnings potential in the region. Starbucks currently operates nearly 3,300 stores in 141 cities in China (compared to over 13,000 in the US). The firm plans to build 600 net new stores per year over the next five years in the region.

Another significant initiative is its global coffee licensing deal with Nestle, under which it will receive $7.15 billion in return for giving it the exclusive rights to sell Starbucks packaged coffee and teas around the world. SBUX currently reaches consumers in about 28 countries, and through Nestle will reach consumers in nearly 190 nations.

Outlook

Starbucks is one of the most recognized coffee brands in the world. For the 12th consecutive year, it was named one of the world’s most ethical companies by the Ethisphere Institute. The ability to get consumers to quickly recognize the brand has already proven quite useful as the firm continues to expand its reach globally. Furthermore, it is a brand that inspires loyalty. Last quarter, it announced an 11% year-over-year increase in membership of its loyalty program to 14.2 million active members in the US.

It will face numerous challenges moving forward, including the need to replace its CFO and competition from other large coffee brands such as Dunkin’ Donuts DNKN. Yet, while it has recently fallen on hard times with sluggish growth in the US, Starbucks is positioning itself well to capture the trends of an ever-changing global consumer climate. Because of its resources and brand recognition, it is uniquely tooled to continue its rapid expansion abroad, which given recent trends, serves as a positive indicator. 

Starbucks currently sits at a Zacks Rank #3 (Hold), and will be an interesting stock for investors to keep an eye on moving forward. 

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