Starbucks CEO Kevin Johnson Talks China, Nestle, and Dividends

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After Starbucks (NASDAQ:SBUX) reported its fiscal 2018 third-quarter results, its CEO Kevin Johnson shared some important information with investors during the subsequent conference call.

Long-term shareholders should pay close attention to three major takeaways from the call.

China will remain a key growth driver

While acknowledging a disappointing Q3, I want to be clear that we have 100% confidence in our growth strategy and the sustainability of the leadership position we have built in the market. Having been in China since 1999, the strength of our brand, the trust we have built with our customers and partners, and our working knowledge of the many nuances of the China market uniquely positions us for continued long-term success.

Starbucks is prioritizing store count expansion in China. It’s been an effective strategy, though a recent acceleration in the pace of new store openings appears to have cannibalized some sales of existing stores, with Starbucks’s China comps falling 2% in the third quarter. Management, however, remains confident that China represents a massive long-term growth opportunity.

To better seize this opportunity, Starbucks plans to offer delivery services across China. It will begin its rollout this fall in Beijing and Shanghai, and it plans to expand across the country in 2019. Starbucks believes this will better position it to profit from the growing trend toward at-home and at-work consumption while also maximizing the profit potential of its steadily expanding retail footprint in China.

All told, Starbucks remains on track to add 600 net new stores annually and to achieve its goal of 6,000 stores across mainland China by fiscal 2022.

A powerful alliance with Nestle

Our second strategic priority is to expand and leverage the Starbucks brand through the Global Coffee Alliance with Nestle. We remain on track to close the Nestle deal in our Fiscal Q4. Nestle is the ideal global partner to accelerate Starbucks’ growth profile by combining our global brand and coffee leadership with the world’s leading distribution network, covering 189 countries.

While Keurig is the leading single-serve coffee maker in the U.S., Nestle‘s (NASDAQOTH:NSRGY) Nespresso and Nescafe platforms are more popular in many other areas of the world, and together they comprise the largest installed base of coffee systems globally. In turn, Starbucks’s alliance with Nestle should be a boon for its international consumer packaged goods aspirations and a highly profitable long-term growth driver.

A person handing out hundred-dollar bills

Investors can expect larger cash payouts from Starbucks in the coming years. Image source: Getty Images.

A focus on efficiency and shareholder returns

Streamline has freed up billions of dollars of capital and has enabled us to focus our management attention and critical resources on the most important priorities for Starbucks, our partners, and our shareholders. Last November, we committed to return $15 billion to shareholders through buy-backs and dividends through Fiscal 2020. As our streamline initiatives have unlocked more net capital and as we have flexed our balance sheet, we have now expanded that commitment to $25 billion through Fiscal 2020. We have already returned over $5 billion to shareholders in the last three quarters alone.

The Nestle deal is an example of how Starbucks is streamlining its operations in order to maximize returns on capital and shareholder value creation. Rather than spending billions to build out its own distribution infrastructure and compete with Nestle head on, Starbucks decided to partner with the global packaged foods titan. Not only does this allow Starbucks to use its limited resources on higher-return projects — such as building out its store base — Starbucks was even able to negotiate a $7 billion up-front payment as part of the deal.

And thanks to its more streamlined cost structure and strong free cash flow generation, Starbucks is now able to pass more of its profits on to shareholders in the form of dividends and share repurchases, both of which should help to boost total returns to investors in the years ahead.

Joe Tenebruso 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.

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