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.
