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Starbucks Reports a Strong Start to Its Year

Starbucks (NASDAQ: SBUX) recently reported strong fiscal first-quarter results, including a 4% increase in same-store sales in the United States. That was largely driven by CEO Kevin Johnson's efforts to focus on execution, which helped drive customers to spend more even as foot traffic remained flat. It's a less risky approach that won't rely (at least for now) on higher-end Reserve stores or adding Reserve bars to 20% of stores, as was originally planned by his predecessor, Howard Schultz.

In this segment from Industry Focus: Consumer Goods , host Shannon Jones and contributor Daniel Kline discuss the coffee titan's latest results.

A full transcript follows the video.

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This video was recorded on Jan. 29, 2019.

Shannon Jones: Let's talk about some of the other folks that are being lured by iced coffee and hot coffee, and specifically to Starbucks. For our listeners joining the Consumer Goods show today, we're going to be talking about Starbucks. They jus t report ed their Q1 earnings for fiscal year 2019. We're going to be talking about that, and also their strategy. Let's start with earnings. What did we see in this first quarter of the year?

Dan Kline: Well, the numbers are good. On a superficial basis, Starbucks tends to sink or fall based on same-store sales. They posted a 4% increase in same-store sales specifically also in the U.S., which is way better than they've been doing. It's a testament to how they've been focusing on operations. They did not increase foot traffic, but they did manage to get people to spend more. That's something they've been working hard on.

Jones: Absolutely. You mentioned that 4% increase in same-store sales. Certainly good for our investors and listeners who've been following Starbucks for some time. Five percent is what the Howard Schultz era has been looking forward to, so to see it 4% is certainly an encouragement, especially when they were below 4% in the past. So, we're starting to see somewhat of a turnaround. Although, I will say, new CEO Kevin Johnson is narrowing the focus in terms of guidance. He's aiming for about 3% to 4% same-store sales, which I think is certainly a much safer way to play it, especially as we get into strategy, what they're going to be doing. Certainly interesting to see that you've got this increase coming from how much consumers are spending. It's the average ticket sales that are driving that, not necessarily foot traffic. We do like to see both, we love that, but here, we'll take what we can get.

Kline: I think you also have a store that's, at least in the United States, near the saturation point. You're not necessarily going to bring in a lot of new customers. Everyone knows what Starbucks is. It's not like they open a Starbucks in your neighborhood, and you're just getting exposed to it. They're opening one in your neighborhood and there are 17 others. So, the fact that you can even stay even in that market, 4% is a pretty big number. And that's 4% based on efficiency. When they first launched mobile order and pay, there were backups in the store. That caused people to literally pop their head in the store, look in and go, "Oh, I'm getting my coffee someplace else." They've managed to handle that problem, and that's largely by efficiency. They've taken about 40% of the work out of the barista's day that doesn't have to do with serving customers. Things like ordering are now automated. Some of the cleaning functions have moved to the end of the day after the stores have closed. They're getting more people in and out, and that might make it easier for you to say, "You know what? I'm getting a latte. I can wait for a sandwich to get heated up. It's not going to be too long."

Jones: Speaking of operational efficiency, I think this is the earmark of new CEO Kevin Johnson. He's a much more disciplined leader. You had Howard Schultz, who was really the visionary, he was the one with these grandiose expansion plans and store concepts like The Reserve, this premium, high-priced coffee. Now, under CEO Kevin Johnson, it's a much more disciplined approach. He's going and targeting the data and analytics that the company has to offer, especially with their app, but also scaling back a lot of those grandiose plans that were there. We saw in this announcement that The Reserve cafes -- at one point, Starbucks was hoping to open up over a thousand of these stores. They've scaled that back, looking to actually pilot this in a few select markets moving forward just to see if it's indeed worth the returns before they start building more. So, under CEO Kevin Johnson, you have a much more disciplined, strategic focus.

Kline: I have very mixed feelings about this. I like the work he's doing to make stores operate better, but I don't like him not having a vision. I think a thousand Reserve stand-alone stores was kind of silly, but he's also scaled back the plan to put Reserve bars into 20% of the existing stores. Now, what Reserve bars would have allowed is Starbucks to have a secondary experience where you spend more money. It's like putting a coffee-based wine bar inside 20% of Starbucks. I've been to the Roastery in Seattle. I've seen how much money people spend and how much they enjoy that tailored experience, where you talk about what you like, and they match your coffee to your pastry and all that. Frankly, I think that would work, and I don't want to see Starbucks just become this company that micromanages the margins and gets rid of innovation.

People sold out the $20 whiskey-barrel-aged coffee at the Roastery in a couple of hours. I hope this is just Johnson taking a measured, careful approach to Howard Schultz, who would just throw everything at the wall and see if it worked. If he's going to test this and then roll it out, I think that's great. If he's mothballing this, like it kind of feels like he's doing, then I'm a little bit concerned.

Daniel B. Kline has no position in any of the stocks mentioned. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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