Shares of Starbucks fell about 11.5% late Tuesday after the coffee giant posted a much weaker quarter than expected. The company also lowered its outlook for fiscal 2024, leaving little room for optimism about a rapid rebound in traffic at its stores. Revenue fell 2% year over year to $8.56 billion in the second quarter of fiscal 2024, below the $9.13 billion expected by analysts, according to LSEG. Adjusted earnings per share of 68 cents fell 14% year over year, missing the estimate by 80 cents. Starbucks Why We Own It: Starbucks has one of the most recognizable brands of any restaurant. But in recent years, operations have been strained by store inefficiency and a slow recovery in China. Under the leadership of CEO Laxman Narasimhan, we believe a plan is in place to unlock growth and improve margins over time. Competitors: Dutch Bros, McDonalds and Dunkin’ Donuts Most Recent Purchase: February 14, 2024 Initiated: August 2022 Conclusion We’ve been saying for weeks to be prepared to miss when Starbucks reports. We thought the setup was similar to the earnings report released a quarter earlier, when the entire market knew a failure was coming. When management missed out by 3 cents per share last quarter but said it had multiple paths to achieving its earnings growth outlook of between 15% and 20%, the stock didn’t fall on the news. This term was very different. The transitional challenges the company discussed last time persisted this quarter. The combination of these ongoing problems with what management described as extreme weather conditions and a difficult consumer environment led to a sharp decline in store traffic, making it too difficult to improve margins and a much bigger failure than expected. Part of the deficit was due to unmet demand, which management is addressing with a plan to free up capacity and improve the customer experience. But the continued slow results lead us to wonder whether Starbucks has alienated its customer base too much by raising prices too high. It’s hard not to worry when you see a month-over-month decline in the number of 90-day active members in the United States using the Starbucks Reward loyalty program, which went from 34, 3 million a quarter ago to 32.8 million, although the result is still up 6% year-on-year. We understand that this is the company’s most loyal base. Starbucks is facing too many headwinds right now, and due to the uncertain timing of when it will overcome them, the stock’s sharp decline is one we don’t intend to buy immediately. As a result, we lower our rating to 2 and reduce our price target to $90, which represents a multiple of approximately 25 times the low end of management’s new EPS outlook. SBUX YTD mountain Starbucks YTD Quarterly Commentary North America same-store sales – a key restaurant industry metric – fell 3%, well below analysts’ estimates of 0.5% growth of Wall Street, according to FactSet. Most concerning here is that transactions were down 7%, which represents a considerable drop in store visitors. The ticket is up 4%, offsetting some of the weak trading, but price increases can only take you so far. Challenges related to a more cautious consumer weighed on the quarter, but management said extreme weather was also a major factor, impacting both U.S. and U.S. composition by 3 percentage points. entire company. Another obstacle was the decline in visits from Starbucks’ so-called “more casual customers,” whose frequency is lower than that of its most loyal customers. During the conference call, CEO Laxman Narasimhan highlighted three execution opportunities to get the U.S. business back on track. The first is to meet demand in each time slot to drive future growth by investing in new tools and implementing new processes. One solution Starbucks offers is its siren system, which is already increasing by nearly a comp point per year in stores that have it. The company must do better to improve operations and reduce wait times in stores to drive growth. So we were delighted to hear that this was a priority. The second is to launch even more new products while continuing to focus on its core coffee offerings. The third is to reach and deliver more value to casual and non-Rewards customers. Unlike last quarter, where operating margin expansion helped offset some of the slowdown in same-store growth, profitability contracted 110 basis points from last year, primarily due to debt reduction, additional investments in store partner salaries and benefits and increased promotional activities. However, the company said the efficiencies generated by its reinvention plan helped offset some of the deleveraging. In Starbucks’ international segment, same-store sales fell 6% and missed estimates of 0.5% growth. The drop was offset by a 3% drop in both transactions and tickets. Results in China were worse, with comparable sales down 11%, transactions down 4% and tickets down 8%, the result of increased promotional activity as the company faces competition growing number of local actors. The Street was looking for stable, comparable sales in China, according to FactSet. But the results were not influenced solely by the promotional environment. The decline in occasional customers and changes in vacation styles also weighed on results. Excluding China, the international segment increased its revenue and composition in Latin America, Asia Pacific and Japan. Guidance Following disappointing second fiscal year results, the company made several downward revisions to its fiscal 2024 guidance. The changes were as follows: Total global revenue growth of single digits in the bottom of the range compared to the previous range of 7% to 10%. Global and U.S. comp growth ranges from a slight single-digit decline to stagnation from the previous range of 4% to 6%. Comparable sales in China are expected to decline by a single-digit percentage compared with expectations of low single-digit growth between the second and fourth quarters. Global net new store growth was reduced from 6% to 7%. This is due to slowing store openings in China, whose growth was revised to 12% from 13%. Operating margins are expected to be stable compared to earlier expectations of gradual expansion. Adjusted EPS growth is expected to be flat in the low single digits, down from its previous range of 15% to 20%. (Jim Cramer’s Charitable Trust is long SBUX. 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A cup of Starbucks coffee sits on a table at a store in Manhattan, New York, on January 30, 2024.
Spencer Platt | Getty Images
Starbucks Shares fell about 11.5% late Tuesday after the coffee giant posted a much weaker quarter than expected. The company also lowered its outlook for fiscal 2024, leaving little room for optimism about a rapid rebound in traffic at its stores.
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