Tag: Starbucks Corporation (SBUX)

Is It Time to Buy SBUX After August’s Surge?

Posted on by The INO.com Team

Starbucks Corporation (SBUX) has been brewing up lately, with its stock appreciating over 24% in the past month. But what’s fueling this caffeinated surge, and is it a good time for investors to jump in?

The Brian Niccol Effect

The recent rally was ignited by the announcement that Brian Niccol, currently CEO of Chipotle Mexican Grill Inc. (CMG), will take over as Starbucks’ new chief executive on September 9. This news came after a challenging period for the coffee retailer under the leadership of Laxman Narasimhan.

Narasimhan's tenure saw a dip in same-store sales in the U.S., complaints about store staffing and long wait times, and increased competition in China. His strategy of focusing on non-coffee drinks and technology improvements diverged from former CEO Howard Schultz’s emphasis on coffee and customer experience, contributing to his departure.

Moreover, this leadership change has been met with enthusiasm by investors, causing the stock to jump 23% on August 13. Niccol is seen as a game-changer for Starbucks. Under his leadership, Chipotle managed to bounce back from food safety issues and maintain strong sales. His knack for integrating technology, automation, and improving customer experiences is just what Starbucks needs right now.

Niccol’s experience with streamlining operations and enhancing customer engagement could help address SBUX’s current issues, from fixing staffing problems to speeding up service. While it's still early to see the impact of Niccol’s leadership, his track record suggests that Starbucks might be in good hands. Given his success at Chipotle and his focus on technology and efficiency, there’s a lot of hope that he could turn things around for Starbucks.

Starbucks' Financial Resilience and Turnaround Efforts

Starbucks may have hit some rough patches recently, but it's still brewing a solid business with robust fundamentals. Despite a dip in sales, it continues to build a loyal customer base that keeps the coffee flowing. In the fiscal third quarter, SBUX's rewards program grew to 33.8 million active members in the United States, indicating a 7% increase year-over-year and 3% sequentially. This growing membership translates to $1.8 billion in deferred revenue on Starbucks payment cards as of June 30, effectively giving the company a handy interest-free loan.

However, the retailer struggled in its major markets: the U.S. and China. In the U.S., same-store sales dipped 2% compared to a 7% increase the previous year. Store traffic fell by 6%, though the average ticket price rose by 4%.

Moreover, due to the competitive landscape and cautious consumer spending in the Chinese market, its comparable-store sales plummeted 14%, down from a 46% increase last year, with both traffic and average ticket price dropping by 7%. However, Starbucks’ Rewards program in China grew by 1.6 million, reaching a record 22 million active members.

Overall, SBUX’s revenue dipped 1% to $9.11 billion, with global comparable-store sales falling by 3%. The company expanded its footprint by opening 526 new stores, ending the quarter with a total of 39,477 locations. The company reported a net income of $1.05 billion, or $0.93 per share, compared to $1.14 billion, or $0.99 per share, from the same period last year.

While these figures could disappoint some investors, Starbucks is brewing up a comeback with a three-part action plan designed to revitalize its business. First, the company is fine-tuning store operations to meet new demand, which includes improving partner scheduling, turnover, and inventory management across nearly 10,000 U.S. stores. New systems, like the Siren Craft, are already showing positive results, helping to speed up service and enhance performance metrics. Starbucks is also accelerating new store openings and renovations in key growth markets to drive expansion.

Moreover, in response to China’s wobbling economy, where competitors are aggressively undercutting prices, Starbucks is exploring ‘strategic partnerships’ to stay competitive. Meanwhile, activist investor Elliott Investment Management’s involvement could potentially push for significant changes like a slower investment pace in China, more aggressive share buybacks, or a faster rollout of new systems. BTIG analyst Peter Saleh believes Elliott’s involvement with Starbucks could accelerate ‘bigger changes’ and impact SBUX’s market strategy.

Additionally, Starbucks is focusing on faster service through new espresso machines and software updates and capitalizing on successful product launches like the Summer-Berry Refreshers. The company also plans to open dozens of delivery-only kitchens in the U.S. and is eyeing growth in smaller cities and suburban areas. With these moves, the retailer aims to boost customer engagement and drive growth, making its stock an exciting option for investors watching its turnaround.

Bottom line

While analysts expect Starbucks to show little to no sales growth this year, expectations are for a return to high-single-digit growth in the future. For the fiscal year ending September 2026, Wall Street forecasts its revenue and EPS to grow by 7.2% and 11.7% year-over-year, respectively. 

In terms of valuation, with a forward non-GAAP P/E ratio of 26.55, the stock remains reasonably valued for such a renowned brand. Although it isn't a bargain as it was a month ago, long-term investors might still find it attractive, especially with potential interest rate cuts on the horizon. With Federal Reserve Chair Jerome Powell signaling the likelihood of lower rates, Starbucks could benefit from a favorable economic environment, making it a stock worth considering for those looking to invest in its potential turnaround.

Can Starbucks (SBUX) Rebound From Earnings Miss?

Posted on by The INO.com Team

Starbucks Corporation (SBUX), the leading coffeehouse chain, reported quarterly revenue and EPS that fell short of analysts’ expectations. Shares of SBUX declined more than 12% in premarket trading Wednesday after the coffee company reported a disappointing quarter. Also, the stock has plunged nearly 18% over the past month and almost 28% over the past six months.

For the second quarter that ended March 31, 2024, SBUX’s net revenues decreased 1.8% year-over-year to $8.56 billion. That missed analysts’ revenue estimate of $9.16 billion.

Global same-store sales decreased by 4% as traffic to its cafes declined 6% in the quarter. Starbucks experienced declining same-store sales and lower traffic across all regions. In North America and the U.S., same-store sales dropped by 3% as traffic fell 7%, marking the second consecutive quarter of challenges in its home market.

Last quarter, executives attributed slow sales to boycotts of the stores related to misperceptions about its stance on Israel.

SBUX’s CEO Laxman Narismhan told analysts on the company’s conference call, “In this environment, many customers have been more exacting about where and how they choose to spend their money.” Narasimhan added that a deteriorating economic outlook in several of its markets had contributed to a significant reduction in customer traffic.

SBUX’ International segment posted same-store sales declines of 6%, with both average ticket and transactions declining. In China, the company's second-largest market, same-store sales fell by 11%, primarily due to an 8% reduction in average ticket.

The coffee giant’s operating income was $1.10 billion, down 17.2% from the prior year’s quarter. Net earnings attributable to SBUX declined 15% year-over-year to $772.40 million. It reported net earnings per share was $0.68, compared to the consensus estimate of $0.80, and down 13.9% year-over-year.

As of March 31, 2024, Starbucks’ cash and cash equivalents stood at $2.76 billion, compared to $3.55 billion as of October 1, 2023. The company’s current assets were $6.47 billion versus $7.30 as of October 1, 2023.

“In a highly challenged environment, this quarter’s results do not reflect the power of our brand, our capabilities or the opportunities ahead,” said Laxman Narasimhan. “It did not meet our expectations, but we understand the specific challenges and opportunities immediately in front of us.”

“We have a clear plan to execute and the entire organization is mobilized around it. We are very confident in our long-term and know that our Triple Shot Reinvention with Two Pumps strategy will deliver on the limitless potential of this brand,” Narasimhan added.

Meanwhile, Rachel Ruggeri, SBUX’s chief financial officer, commented, “While it was a difficult quarter, we learned from our own underperformance and sharpened our focus with a comprehensive roadmap of well thought out actions making the path forward clear.”

“On this path, we remain committed to our disciplined approach to capital allocation as we navigate this complex and dynamic environment,” he added. 

Bleak Fiscal 2024 Outlook

For the fiscal year 2024, SBUX expects revenue growth in the low single digits, compared to the prior guidance of 7% to 10%. The coffee giant also revised its forecasts for global and U.S. same-store sales growth to a range of low single digits to flat from its prior projection of 4% to 6%.

Starbucks’ same-store sales in China are anticipated to decrease by single digits, compared to the previous guidance of a single-digit increase. The company further expects EPS growth to range from flat to low single digits. Previously, it expected its earnings to surge 15% to 20% in 2024.

However, the company projects that sales might improve in the fourth quarter of 2024.

In addition, SBUX’s CEO Narasimhan said that the company now expects supply-chain cost savings of $4 billion over the next four years, revising its previous outlook of $3 billion over three years.

Strategic Initiatives

In February 2024, SBUX and Bank of America Corporation (BAC), the prominent financial institution, announced a new collaboration that offers millions of Bank of America cardholders and Starbucks Rewards® members in the U.S. the ability to earn more benefits by linking accounts.

Bank of America cardholders and Starbucks Rewards members can earn an additional 2% cash back on qualifying purchases on top of their existing rewards or card benefits. Additionally, they can earn 1 Star per $2 spent at Starbucks by linking an eligible debit or credit card to their Starbucks Rewards account at BofA.com/starbucks or starbucks.com/bofa.

Ryan Butz, vice president of loyalty strategy and marketing at Starbucks, said, “This partnership is the latest example of how we are continuing to invest in our most loyal customers to deepen engagement and connection by offering benefits and experiences that can’t be found anywhere else.”

Despite near-term macroeconomic headwinds, the Seattle-based coffee company remains focused on its long-term growth and outsized returns to partners, customers, and shareholders.

In November last year, SBUX announced its long-term growth strategy, Triple Shot Reinvention with Two Pumps, to elevate the brand, strengthen and scale digital, identify opportunities within and outside the store for efficiencies, expand globally, and reinvigorate the partner (employee) culture. 

For the quarter that ended March 31, 2024, Starbucks’ U.S. store count stood at 16,600, a 3% increase year-over-year. The company aspires to reach 20,000 over the long term, leveraging the vast channels available to meet the changing customer needs and further elevate the brand.

“Innovation in our store formats, to purpose defined stores like pick-up, drive-thru only, double-sided drive-thru, and delivery-only allows us to better meet our customers where they are at through differentiated experiences,” said Sara Trilling, executive vice president and president of Starbucks North America.

In addition, the brand will be elevated via product innovation. Also, SBUX introduced a new phase in the acceleration of its digital flywheel. The coffee chain wants to strengthen its digital leadership with a strategy aimed at Double global Starbucks Rewards with another 75 million members within the next five years.

Also, SBUX announced new technology collaborations to improve the partner and customer experience. The partnership with Microsoft Corporation (MSFT) will continue through joint efforts in its innovation lab, combining industry-leading generative AI capabilities to advance product development and personalization to the next level.

Further, Starbucks will collaborate with Apple (AAPL) products in its first Green Apron Innovation store to experiment and refine technology to help partners worldwide. The company will also reimage the customer in-store experience with Amazon One and Just Walk Out technology. 

SBUX also announced a plan to expand its global store footprint to 55,000 by 2030, bolstered by further expansion of digital platforms across all licensed partners worldwide. 

The company further announced the implementation of a $3 billion efficiency program – with $2 billion outside the store in cost of goods sold – to reinvest in the business and deliver returns to shareholders through margin expansion and earnings growth.  

Bottom Line

SBUX reported weaker-than-expected revenue and earnings in the second quarter of fiscal 2024, driven by a significant decline in same-store sales. After a disastrous quarter, the coffee giant lowered its outlook for the full-year earnings and revenue; however, it forecasts sales will start improving in the fourth quarter of 2024.

Regarding disappointing financial performance, CEO Laxman Narasimhan said customers had been more cautious about where and how they spend their money during the quarter. The U.S. consumer confidence deteriorated for the third consecutive month in April as consumers continued to fight persistently high prices and elevated interest rates.

Starbucks added that bad weather also closed some U.S. stores briefly in the quarter. China, the company's second-largest market, also witnessed a choppy post-COVID recovery. Further, it is facing an ongoing boycott of its stores for its perceived support of Israel in the war in Gaza.

Despite near-term macro challenges, the coffee giant stays committed to its long-term growth strategy, Triple Shot Reinvention with Two Pumps, which priorities elevating the Starbucks brand, strengthening the company’s digital capabilities, becoming more global by accelerating store expansion, unlocking efficiency by cost savings, and reinvigorating the partner culture.

Starbucks continues to deliver significant value to partners, customers, and shareholders. On March 21, SBUX’s Board of Directors approved a quarterly cash dividend of $0.57 per share of outstanding common stock, payable in cash on May 31, 2024.

SBUX pays an annual dividend of $2.28 per share, which translates to a yield of 3.12% on the current share price. Its four-year average dividend yield is 2%. The company’s dividend payouts have grown at a CAGR of 9.8% over the past five years. Moreover, Starbucks has raised its dividend for 13 consecutive years.

Although the road to recovery might be rocky, investors should watch closely for improvements in SBUX’s same-store sales, gains from ongoing strategic initiatives, and global store expansion. Hence, it could be wise to wait for a better entry in this stock for now.

Investor Alert: Starbucks' Legal Challenges Raise Questions About Stock Viability

Posted on by The INO.com Team

Earlier this month, three Starbucks Corporation (SBUX) customers, Maria Bollinger, Dawn Miller, and Shunda Smith, filed a $5 million class-action lawsuit alleging discrimination in the U.S. District Court for the Eastern District of California against SBUX. Their argument centered around SBUX charging extra for non-dairy milk and unfairly targeting individuals with lactose intolerance – a condition that affects their ability to consume dairy.

The lawsuit alleges an "excessively high" fee, specifically a surcharge of $0.50 to $0.80, on beverages at SBUX that offer non-dairy and lactose-free options such as soy, almond, coconut, and oat milk. The Americans with Disabilities Act (ADA) considers lactose intolerance, a condition that impacts 30 million to 50 million Americans, as qualifying for disability status.

Plaintiffs contended that SBUX violated their rights under the ADA and California Unruh Civil Rights Act - an act prohibiting businesses from discriminating against state residents based on age, race, sex, and disability, among other criteria, because they charge extra for plant-based milk in their beverages.

However, an SBUX spokesperson emphasized that domestic customers indeed enjoy non-dairy options without any additional charges, stating that "In U.S. Starbucks stores, at no additional cost, customers can add up to four ounces of non-dairy milk to hot or iced brewed coffee or tea, cold brew and Americano beverages."

Such controversy could corrode consumer trust and loyalty, precipitating decreased sales and profitability. Should an indictment of violating anti-discrimination laws befall SBUX, substantial financial penalties combined with brand image damage are probable. These factors could significantly influence shareholder value over the long term.

Safety Concerns Threaten Reputation and Consumer Trust

Apart from the abovementioned conflict, the company is also grappling with other challenges. This month, the federal safety agency reported that it is recalling over 440,000 Nestlé S.A. (NSRGY)-manufactured SBUX-branded mugs sold during the winter holidays. The action follows numerous user complaints of burns or lacerations.

The U.S. Consumer Product Safety Commission stated that microwaving or filling the mugs with extremely hot liquid caused them to overheat or shatter, presenting burn and laceration risks. 

SBUX-branded mugs' recall due to safety hazards significantly threatens the company’s reputation and consumer trust. The incident could result in potential legal and financial repercussions and tarnish the company's image, consequently affecting future merchandise sales and its bottom line.

The Fallout From Controversies Over International Conflicts

Since Israel's military offensive in Gaza, global protests and grassroots boycott campaigns have impacted SBUX. After the company sued its workers' union over a social media post in October, an activist called to boycott SBUX products.

The chain accused that by using their company name and logo on X (previously Twitter) to express solidarity with Palestinians, Workers United had violated its trademark. In response, Workers United filed its court document, accusing SBUX of defamation, specifically suggesting that the union endorses terrorism and violence.

Due to the unresolved disagreement, SBUX found itself targeted by both pro-Palestine and pro-Israel protests. CEO Laxman Narasimhan acknowledged this in a year-end letter published highlighting vandalism instances experienced in global cities and within U.S.-based SBUX stores.

Denying political affiliations, SBUX rebutted social media rumors suggesting ties to governmental or military operations.

The escalating protests and boycotts could threaten the brand's reputation, sales, and consumer trust. These challenges could also affect SBUX's financial standing and future viability as it navigates the complexities of international conflicts and societal pressures.

Starbucks' Sales Woes and Investor Concerns

In its fiscal 2024 first quarter release, SBUX reported that global same-store sales had only risen by 5% year-over-year in the three months leading up to January. The company also downgraded its guidance, projecting an increase between 4% and 6% in global same-store sales for the full year of 2024.

On an earnings call, Narasimhan asserted that the company observed a negative impact on its business in the Middle East. He added that since mid-November, the chain's U.S. sales have also lagged, partly due to public "misperceptions" about SBUX's stance on the conflict.

Some analysts, however, attribute the sales slowdown to a broader decline in sentiment among U.S. consumers and an economic recovery stall in China – its second-largest market with approximately 6,500 outlets. They point out that others noticed this trend coincided with a new winter menu launch, which could have underwhelmed customers.

Furthermore, the Frappuccino provider recently admitted to an unsuccessful beta test of their non-fungible token loyalty website named Starbucks Odyssey. Concurrently, Executive Vice President and CFO Rachel Ruggeri chose to sell 3,221 shares on March 4, 2024.

Over the past year, Ruggeri sold 5,246 shares without making any purchases in the SBUX stock. Her transaction history reveals consistent selling patterns with no recorded insider buys within that period. On the other hand, ten insider sales occurred at the company during this same timeframe, indicating an overarching trend among its insiders.

Bottom Line

The coffee company has been committed to ethically sourcing and roasting high-quality arabica coffee since 1971, and it stands today as the world's premier specialty coffee roaster and retailer, with over 38,000 stores globally. However, shares of SBUX have plunged 4.8% over the past month.

While the company's reputation and legal standing might improve in the future, its present fundamentals appear weak. Thus, it could be wise to wait for a better entry point into the stock.

The Role of China in the Global Stock Market and Its Impact on Investors

Posted on by The INO.com Team

Towards the end of last year, China surprised the world with an abrupt pivot away from the strict restrictions of its long-espoused “Zero-Covid” policy., including quarantine requirements for inbound visitors. Despite an initial surge in infections, global businesses rushed in, hoping to cash in on the economic recovery.

Sentiments were further boosted by steps to stimulate economic growth and domestic consumption, mapped during and around the annual Central Economic Work Conference. These steps also helped ailing Chinese developers ease their liquidity strains and revive home purchases.

These measures seem to be working. According to the data released by China’s National Bureau of Statistics on April 18, the country’s GDP grew by 4.5% in the first quarter of the fiscal year. This was better than the forecast of 4% and the highest growth since the first quarter of last year.

Six months on, while the country is still open for business, the momentum has visibly slowed. While China’s exports in April grew by 8.5%, the country’s imports declined by 7.9% year-over-year as growth in the service sector softened, and manufacturing contracted again in three months.

With the 50-mark separating growth and contraction, the Caixin/S&P Global services purchasing managers’ index fell to 56.4 in April from 57.8 in the previous month, and the Caixin China general manufacturing purchasing managers’ index fell to 49.5 in April.

China’s top leaders have also taken note. A translated state media readout of the Plitburo meeting said, “At present the positive turn in China’s economy is primarily one of a recovery. Internal drivers still aren’t strong, and demand is still insufficient.”

As a result of this patchy growth, analysts at Morgan Stanley foresee a significant dip in demand and output of Chinese steel that could result in a 28% decline in iron ore prices by the end of 2023.

With markets mirroring this moderation, Citi has pushed back its stock rebound forecasts, and its analysts expect Hang Seng to take until the end of September to reach 24,000. Continue reading "The Role of China in the Global Stock Market and Its Impact on Investors" →