One would think Starbucks (SBUX -1.26%) would be taking off as the world recovers from COVID-19. After all, the premium consumer brand suffered from economic lockdowns, but now that everyone is out and on the move again, and many small business competitors closed down during COVID, shares should be on the upswing, right?
Instead, Starbucks shareholders have seen the opposite. High inflation, a unionization push, geopolitical tensions with the company's main international market of China, the unexpected resignation of its CEO, and, yesterday, the suspension of the company's buyback program have all weighed on the stock. On a positive day for the markets, Starbucks fell 3.7% Monday, and it's now down 25% of the year.
However, the current pessimism could be an opportunity for those with an eye on the long term.
Founder Howard Schultz takes over and wastes no time
At the March 16 annual shareholders' meeting, CEO Kevin Johnson announced he would be retiring, with founder Howard Schultz returning to the head role on a temporary basis. Although Johnson had reportedly told the board he was "considering" retiring a year ago, the recent heightened tensions with Starbucks' labor force may have had something to do with his decision.
After all, the first Starbucks store voted to unionize just recently, back in December. On Monday, just two weeks after taking the helm, Schultz announced the company would be suspending its share repurchase program, as he would embark on a listening tour of Starbucks locations around the country to hear partners' concerns. (Starbucks refers to its store employees as partners.)
It's not surprising that shareholders sold first and asked questions later. With the suspension of share repurchases and with 10 stores now having voted to unionize, including the company's 100-employee Roastery in New York, investors can anticipate less money going to shareholders and more to employees in the near term.
Why the fear may be overdone
Shares of Starbucks had probably reflected some of these headwinds already, as shares are now down some 30% from their all-time highs set back last summer. The unionization push has been in the news for many months, and while management reiterated its revenue guidance for 2022 on the recent earnings release in February, it also pointed to margin pressures from inflation and wage increases. Starbucks had already announced a step-up in average hourly wages to $17, which will be implemented this summer. It's likely the buyback program would have necessitated taking on more debt to a company; with interest rates on the rise, that may also have been a less attractive option anyway.
Shares now trade around 26 times this year's earnings estimates, which have been reset lower. That's certainly not cheap in an absolute sense, but it's quite reasonable for one of the biggest brands in the quick service restaurant sector. In addition, Starbucks predicts earnings per share will accelerate after 2022, once the company is through this period of high inflation and wage increases. Management recently projected 10%-12% adjusted (non-GAAP) earnings-per-share growth in 2023 and 2024, which would mark higher growth than the 8%-10% it sees this year.
Operating margin clocked in at 14% last quarter, below the long-term average in the high teens and Starbucks' long-term target of 18%-19%. That leaves a lot of room for improvement.
Schultz has steered Starbucks through choppy waters before
Investors should also take comfort in Schultz's return as CEO. Schultz, who retired for the second time in 2017, had initially retired all the way back in 2000. After a tumultuous period for the company, and as the Great Financial Crisis of 2008 began to emerge, Schultz returned early that year.
As was the case then, the economy was in turmoil, Starbucks' brand was fading, and Starbucks also faced employee backlash over working conditions and internal tipping procedures. Schultz navigated those headwinds by making some difficult decisions, including firing executives, shutting down underperforming stores, and reinvesting in the brand by increasing Starbucks' purchases of fair-trade, ethically sourced coffee.
While the economy is not nearly as bad as it was back then, the employee-related issues are more acute amid the current labor shortage coming out of the pandemic. To date, only 10 Starbucks stores have unionized, but 160 more stores will have unionization votes in the coming weeks. That's only a small portion of the company's 9,000 company-owned stores, but it could be the start of a more prolonged negotiation period.
Fortunately, Schultz is perhaps the best person to lead these negotiations with a newly empowered workforce. After all, Starbucks was one of the first retailers to offer health benefits and shares of the company to all full- and part-time workers. This was implemented long ago, in the late 1980s and early 1990s. More recently, Starbucks expanded its parental leave policies in 2017, and it achieved 100% gender and race pay parity in 2018. In fact, Starbucks has long been at the forefront of the multistakeholder corporate philosophy, which balances the interests of not just shareholders but also workers, suppliers, and customers.
Given that partner benefits have long been part of Starbucks' DNA, and that these programs were designed by Schultz himself, current issues around safety, COVID-19, pay raises, and total hours offered seem like fixable problems.
While other sectors have made lots of headlines during the recent inflationary period, many consumer-oriented stocks have been punished severely. Now may be the time to begin looking at top brands in the sector, such as Starbucks, once again.