Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Since the start of the year, Starbucks (NASDAQ: SBUX) has lost $23.2 billion in market value. The coffeehouse chain’s stock suffered a particularly steep drop on April 30th after the release of Q2 2024 earnings.
This period contributed most to Starbucks’s value drain, accounting for a $14.3 billion reduction in market cap. With a year-to-date performance of negative 19%, would that make Starbucks stock an opportunity or a precursor to greater losses?
But before looking at the broader landscape in which Starbucks operates, what did the earnings report say?
Starbucks’ Downturn in Sales
Ending March 31st, 2024, Starbucks reported a 4% decline in global comparable store sales. Consolidated net revenue dropped to $8.6 billion, a 2% decrease from the year-ago quarter. Starbucks chief financial officer Rachel Ruggeri attributes this to a “complex and dynamic environment.”
In North America alone, operating income dropped 6% year-over-year to $1.1 billion, while overall net earnings decreased to $772.4 million from $908.3 million in Q2 2023. It also bears noting that Starbucks spent more than double on stock buybacks from that quarter, at $1.26 billion vs $479.3 million, respectively.
This figure aligns with the cash dividends paid of $1.29 billion. As we’ve seen with the recent record-breaking Apple example, once-controversial stock buybacks are a common tactic to retain investor confidence.
When it comes to forecast expectations, Q2 was Starbucks’ second consecutive quarter, since beating estimates in Q3 ’23, to fail earnings per share consensus. And at a surprise of -13.92% ($0.68 reported vs $0.79 forecasted), it was a much greater failure than the one in Q4 ‘23 of -2.17%.
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Are Starbucks Fundamentals Sound?
As a service provider, Starbucks is on the lower end of people’s priorities for needs. Considering this, the company relies on branding and in-store experience to leverage social capital, similar to Apple.
In other words, people who don’t care for Starbucks’ in-store experience would be much better off going to Costco with its frequent discounts to boot. This is why Costco (NASDAQ: COST) was recommended in January, with its stock price increasing from $657 to $787 per share since then.
During that same period, SBUX shares dropped from $93 to $75 per share. Inflation pressures have made people more mindful of their spending habits. The San Francisco Federal Reserve recently reported a complete depletion of cumulative pandemic-era excess savings.
At their peak in August 2021, they accounted for $2.1 trillion, having since drained to negative $72 billion by March 2024. Moreover, it is still unclear if the US hasn’t unofficially entered a recession. So far, updated mid-April, the Conference Board Leading Economic Index (LEI) is pointing toward a recovery.
While the growth is still negative year-over-year (YoY), it appears that recession has been avoided. Image credit: The Conference Board
However, coming into the election season, economic data should be taken with a grain of salt. After all, even the Fed Governor Christopher Waller complained that frequent economic data revisions make it difficult to deliver informed monetary policy decisions.
What About Starbucks’ Flexibility?
Given the uncertainty of the “complex operating environment” mentioned in Starbucks’s earnings report, is it amenable to changing course?
Regarding pricing, it appears that it is off the coffee table. The company has been offloading inflation to its customers by increasing product prices, not lowering them. Moreover, Starbucks has to comply with mandatory minimum wage increases, which occasionally pop up across states.
This puts additional pressure on retailers to increase prices, which in turn increases customers’ pressure to ditch the brand. In contrast, utility companies that everyone needs can afford to tweak their pricing schemes accordingly. Investors should ask themselves if Starbucks has the capacity for that kind of flexibility.
To counter these pressures, Starbucks is focusing on boosting the attraction of Rewards memberships. In February, the company linked accounts with Bank of America for 2% cashback. However, even former Starbucks CEO Howard Schultz is warning that this may not be enough.
In a LinkedIn post, he noted there are no quick fixes. In particular, “the stores require a maniacal focus on the customer experience, through the eyes of a merchant. The answer does not lie in data, but in the stores.”
While the macro environment remains unpredictable, Starbucks forecasted to “return $20 billion to shareholders by the end of fiscal 2025” via dividends and stock buybacks. At the same time, this trend has been heading against the ongoing unionization of the Starbucks workforce. That this represents a clear threat to the company’s bottom line was acknowledged in the November 2021 filing.
“…labor costs, including wages and benefits, which, in a retail business such as ours, are two of our most significant costs,”
While fast-food chains are steadily rolling out automated kiosks to cut costs, Starbucks has yet to shift in this direction, which would erode its very branding.
“…our labor costs could increase and our business could be negatively affected by other requirements and expectations that could increase our costs,”
Where Does Analyst Forecasting Stand on SBUX Stock?
At the present price level of $75.63, SBUX shares are very close to their 52-week low of $71.80 per share. For the last 52 weeks, the average SBUX price has been holding at $95. According to analyst forecasting pulled by Nasdaq, this is a buy-on weakness opportunity.
The lowest estimate is aligned with the present price at $75, while the average SBUX price target is $88.48 per share. WSJ’s estimate is even more optimistic, with a low target of $77, while the average target is $87.90 per share.
It remains to be seen if Starbucks brand loyalty will materialize these targets, aided by further stock buybacks.
Do you keep track of expenses like Starbucks drinks or compare them to alternatives? Let us know in the comments below.
Disclaimer: The author does not hold or have a position in any securities discussed in the article.
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