Down 22% YTD, What Lies Ahead For Starbucks’ Stock?

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SBUX: Starbucks logo
SBUX
Starbucks

[Note: Starbucks’ fiscal year 2023 ended October 1]

After a 22% decline so far this year, at the current price of around $75 per share, we believe Starbucks stock (NASDAQ: SBUX), the world’s leading roaster, marketer, and retailer of specialty coffee worldwide, could see modest gains in the longer term. SBUX stock has declined from around $93 to $75 YTD, largely underperforming the broader indices, with the S&P growing about 6% over the same period. SBUX’s stock declines can be attributed to investors’ concern about a sharp decline in same-store sales and a significant miss on earnings per share and net revenue expectations. Starbucks reported fiscal Q2 2024 adjusted EPS of $0.68, well below the consensus of $0.80 (down 7% year-over-year (y-o-y)), primarily due to weak net revenue of just $8.6 billion (down 2% y-o-y and 6.5% below consensus) and a 240 basis point decline in operating margin. In fact, the coffee king’s Q2 operating margin was just 12.8%, well below the ten-year average of 15.1%. In addition, comparable sales for the entire company were down 4.0%, driven by a 6% decline in total transactions, partially offset by a 2% increase in average spending per customer. Rising operating costs of its stores, increased promotional activities, and higher wages were mainly responsible for the rather weak outcome. China saw the worst decline in comparable sales (-11%) in Q2. Since 18% of all SBUX stores are in China, this geography remains a challenge to the company.

Due to the disappointing Q2 results, Starbucks slashed its full-year outlook. The company is now calling for fiscal 2024 revenue growth in the low single-digits, down from its previous range of 7% to 10% y-o-y growth. It should be mentioned that inflationary pressures played a big role in the company’s weak Q2 results. Nevertheless, the coffee business is lucrative as it lends itself to repeat purchases, which puts Starbucks in a strong position. The premium coffee products offered by Starbucks involve no significant technological disruptions, and the industry’s slow pace of progress should help Starbucks make it through the long term. In light of this year’s market decline, shares are currently trading at a compelling price-to-earnings ratio of only ~21 (compared to a high 20s historical figure). We believe the coffee company’s stock could see gains based on the fact that it is still growing in the United States and has substantial growth potential in China and beyond.

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SBUX stock has faced a notable decline of 30% from levels of $105 in early January 2021 to around $75 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the decrease in SBUX stock has been far from consistent. Returns for the stock were 9% in 2021, -15% in 2022, and -3% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that SBUX underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SBUX face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

In the fiercely competitive restaurant industry, how does Starbucks stand out?

  • Overall, 77% of Starbucks’ total revenue comes from the North American market, where it has 18,065 locations (grew 3% y-o-y in Q2).
  • Starbucks reported 32.8 million 90-day active rewards members in the U.S. as of March 31, an increase of 6% y-o-y.  This is a big positive, indicating that most loyal customers still come in despite higher pricing and inflationary pressures.
  • Starbucks’ prior investments in delivery, mobile app, beverage innovation, and its membership program have generated loyalty. Mobile orders and payments were up 31% year-over-year (y-o-y) in the fiscal second quarter.
  • Starbucks opened 364 net new stores in Q2 with 52% being company-operated and the rest licensed stores. The company has 38,951 stores worldwide at present, yet management believes there are still plenty of opportunities to expand the retail footprint of the company. The company expects to have 55,000 Starbucks locations across 100 different markets by the year 2030 – with 75% of this expansion outside the U.S. market.
  • Q2 gross margin improved slightly compared to the previous year’s first quarter – by 120 basis points – to 69.0%. Consumers are willing to pay for the products they deem premium, based on Starbucks’ high gross margin – which gives the business room to absorb higher input costs while still being profitable. Starbucks has consistently been able to raise prices throughout the inflationary environment in the U.S. – demonstrating the strength of its business.
  • The pandemic has resulted in consumers showing less enthusiasm for sitting down and enjoying hot drinks, and more interest in handcrafted, cold beverages on the go. 63% of the company’s beverage sales in Q2 were cold, up 1% from a year ago.

We have updated our model following the Q2 release. We forecast Starbucks’ Revenues to be $36.7 billion for the fiscal year 2024, up 2% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $3.75. Given the changes to our revenues and EPS forecast, we have revised our Starbucks’ Valuation to $80 per share, based on a $3.75 expected EPS and a 21.4x P/E multiple for the fiscal year 2024 – almost 7% higher than the current market price.

It is helpful to see how its peers stack up. SBUX Peers shows how Starbucks’ stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 SBUX Return -15% -22% 35%
 S&P 500 Return 1% 6% 126%
 Trefis Reinforced Value Portfolio 0% 0% 612%

[1] Returns as of 5/3/2024
[2] Cumulative total returns since the end of 2016

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