Starbucks Earnings: Rewarded For Opening Up

(Bloomberg Gadfly) -- Here's a lesson to all companies: More disclosure is better than less. 

Investors have soured on Starbucks Corp. in recent months as the coffee chain's sales have slowed and its earnings performance has failed to match lofty expectations. Shares have dropped nearly 18 percent in the past year.

But on Thursday, Starbucks rose as high as 5 percent in late trading. Why the change of heart? 

It certainly helped that Starbucks offered a sturdy 2017 outlook as it reported third-quarter earnings that beat analyst estimates. But the company also revealed numbers that bolstered confidence in its ability to withstand a terrible time for restaurant chains.

Namely, for the first time since it changed the program, Starbucks explained and quantified -- pretty high up in its press release -- the impact its loyalty and rewards program had on financial results. 

Declining customer traffic has been a worry for investors in the past year. But Thursday's release showed that much of the decline has been due to a quirk of the new loyalty system.

Previously, Starbucks gave customers points for each transaction. You'd go to the register to buy, say, a muffin and a cappuccino and ask the cashier to ring each item up separately, to get extra points. The new loyalty program, however, rewards for total spending, not individual transactions. That change made it difficult to compare traffic and ticket amounts from one year to the next -- the changes have inflated average ticket totals and deflated traffic numbers.  

On Thursday, Starbucks said that, in the third quarter, adjusting for the loyalty program changes shifted traffic from negative 1 percent to positive 1 percent growth from a year earlier.

Cutting register transactions by 10 percent from a year earlier, helped by eliminating those duplicate orders along with mobile ordering, also helped boost employee productivity and cut costs.

The disclosure doesn't change the fact that sales are slowing, but same-store sales stabilized from the quarter before. And while the comparisons will continue to be murky over the next two quarters, they will get easier once Starbucks laps the loyalty program changes.

Starbucks certainly has some more work to do, particularly in terms of getting its new loyalty program right, ramping up its food offerings and dealing with rising labor costs. It's not immune to falling food prices and other sector-wide problems afflicting the industry. But the latest quarter shows Starbucks has found its footing again.

And, as I've argued here and here, its rewards change could ultimately boost growth, as will its plans to offer more food and build more than 2,000 stores next year across China and other parts of the world. 

Plus, the stock's valuation has come down to more appetizing levels: Shares now trade at 24 times forward earnings, versus an average multiple over the past two years of 28 times forward earnings. Maybe Starbucks will be more palatable to investors now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Shelly Banjo in New York at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.