Starbucks reports quarterly earnings as pandemic continues to hit

Greg Portell, partner and consumer practice lead at Kearney, talks about the latest figures out from the U.S. coffee chain.

Video Transcript

SEANA SMITH: Starbucks reporting its quarterly results here just a few minutes ago. A mixed report from the company. Earnings per share coming in a bit better than expected, just by a penny, coming in at $1. That's on an adjusted basis. The expectation was for $0.99. Revenue a bit light, coming in at $8.15 billion. The estimate was for $8.2 billion. So, more broadly speaking, in line with expectations.

We want to bring in Greg Portell. He's a Kearney partner and head of global consumer industries and the retail practice there. Greg, just your initial thoughts on these results. We're seeing shares off just about 1% after hours.

GREG PORTELL: Well, it's nice that they were able to exceed the earnings expectations even though they fell short on revenue because that's normally a sign that they have a pretty good thumb on how the cost-revenue equation works. And given the odd inflationary environment and the rebound coming out of COVID, that speaks highly of management's abilities right now.

SEANA SMITH: Greg, what do you make of the comp-sales numbers? Because we know China is a very important part of this story. China comp sales were off 7%. The expectation was for a decline of 7 and 1/2%. But still that decline of 7%, how big of a headwind is that?

GREG PORTELL: Well, I think the headwind is more the uncertainty than it is anything else. I mean, we're in a world where it's almost impossible to predict what's going to happen tomorrow, let alone in a quarter this dynamic. So the fact that they're a little bit off of expectations and down versus prior year is not that surprising or worrying overall. They seem to be handling the disruption very well considering everything that's going on right now.

SEANA SMITH: Greg, well, I guess, where do you see Starbucks in this road to recovery? We know that this is a stock that obviously took a hit because of the pandemic. Not as many people were going out, buying coffee as they were just a year and a half ago. How much further do they have to go in order to recover and reach where they were just about a year and a half ago?

GREG PORTELL: Well, they're definitely a bellwether of consumer reactiveness. So they do depend on the consumer segment coming back for them. Now, what will be interesting is can they match their growth expectations given the challenges in the labor market? And we saw them increase salary and increase pay, which makes sense given the tight market. But where they really have an advantage is the ability to tie those dollars to a sense of meaning, a sense of purpose, and as we've seen them do in the past, really strengthen their employee value proposition. That ability to drive labor will tie directly into their growth ambition, which will be the indicator of how fast they're going to rebound.

SEANA SMITH: And, Greg, the supply-chain issues-- obviously Starbucks is not exempt from some of these headwinds that a number of companies have been facing, but to what extent is Starbucks being impacted from this?

GREG PORTELL: They seem to be handling it pretty well. I mean, they are less impacted by the container issues going into the ports. They're moving in an agricultural supply chain, which is different than a lot of the goods we see coming in from China.

They obviously have global instability in some of the markets where they are growing and sourcing their coffee from, which will always be a challenge and a bit of instability, but they've been able to deal with that in the past.

Their biggest challenge is going to be how do they get ahead of the inflationary trends in coffee and can they get that pricing passed through to the consumers? Thus far, it looks like they can.

SEANA SMITH: Greg, the rewards loyalty program, 90-day active members jumped to 24.8 million. It's up 28% compared to a year ago. How important is this part of the story?

GREG PORTELL: Well, the big challenge we've seen is this concept of time elasticity for consumers. How long will they wait for various different products? The loyalty programs that Starbucks has been able to pioneer are really focused on making the transaction easier and more quick-- or more-- you know faster for consumers, and that ability to really speed and accelerate the transaction is a key for them. So the more people they can get into the loyalty program, the better control they'll have over the customer experience and ultimately the pricing they're able to get through to consumers.

It also feeds their innovation pipeline, which means the more people they have into the program, the stronger and more stable the earnings will be going forward.

SEANA SMITH: And, Greg, just the labor constraints that we were mentioning before, of course that goes hand in hand with the supply-chain issues that a number of these companies are facing. But we covered the big announcement yesterday when Starbucks said that it was raising its minimum wage. I guess how are you viewing this from an analyst perspective on what this means for the company?

GREG PORTELL: Well, I'm not so impressed about the pay increases because pay is something that everyone can match, and we're seeing inflation and demand kind of sort that market out. So we would expect to see labor wages continue to rise across the board.

Where Starbucks has an advantage is really twofold. One, they have the ability to add the other elements of the employee experience into their value proposition. They can offer the education, they can offer the career development, and they can offer a pleasant work experience or work environment when they really invest in their store locations.

The second part of it is as the labor prices increase and their costs increase, they seem to be able to create the innovation in their product that allow them to recoup those prices as they pass along the cost to the consumer. So they're protected on both sides of the labor equation, which bodes well for them going forward versus other competitors in the space.

SEANA SMITH: Greg, what's the number-one question you want to ask or you want to hear asked during the earnings call this afternoon?

GREG PORTELL: The real question for me is how they're going to adjust the experience in stores because as they grow and as they rely more on front-line labor and the experience that consumers and the employees have in the store, they need to create an environment that's safe. As we start seeing more and hearing more stories about poorly performing or poorly behaving consumers, Starbucks and other companies need to protect their employees in that environment, and I'd be looking for them to take a fairly strong stance as they start looking at that sense of purpose between the relationship they have between their employees and the consumers

SEANA SMITH: Greg Portell, Kearney partner and head of global consumer industries and retail practice, thanks so much for joining us. Again, Starbucks shares under pressure, off just around 1%.