Investors have been thrilled with Starbucks (SBUX +1.96%) over the past 10 years -- a period that has seen its shares gain 350% versus about 200% for the S&P 500. However, the largest coffee chain in the world has been weighing down portfolios lately with its stock down about 25% so far this year. Here are three reasons why that might be happening.
Reason one: China
Starbucks recently announced a record quarterly revenue of $8.2 billion, but there's more than meets the eye. The company has made a big bet on China over the years, growing its store count to 5,761 locations, or about 16.5% of its total portfolio. However, China currently has strict COVID-19 restrictions for its residents, resulting in plummeting sales.
NASDAQ: SBUX
Key Data Points
Specifically, revenue in China fell from $905 million in Starbucks' fiscal 2021 third quarter to $544 million in Q3 2022, or about 40%. The average ticket -- an important metric that measures the company's ability to raise prices -- fell by 1% in China during that time. For comparison, North American revenue and average ticket grew 13% and 8% over the same period, respectively.
Management must believe in China's long-term potential since Starbucks grew its China store count by 12% to 5,761 over the past 12 months. But whether or not the country eases COVID restrictions is entirely out of Starbucks' control.
Reason two: Suspended guidance
Starbucks suspended guidance after its fiscal 2022 second-quarter earnings, and didn't issue any after its third quarter either. In addition to its struggles in China, management pointed to "accelerating inflation and the significant investments we're planning" as other reasons why it suspended guidance.
While management provided no specific guidance, Starbucks CFO Rachel Ruggeri did note that she expects fiscal fourth-quarter operating margin and earnings per share (EPS) to be lower than fiscal Q3. For reference, both Starbucks' operating margin and adjusted EPS were already down year over year for its fiscal Q3 2021.
Specifically, the company's non-GAAP operating margin was 16.9%, down from 20.4% in fiscal Q3 2021, and its adjusted EPS was $0.84 per share, down from $0.99 per share in its fiscal Q3 2021.
Reason three: CEO succession
The first question on Starbucks' most recent earnings call centered around who will replace CEO Howard Schultz. That's because the company has struggled to find a long-term replacement for Schultz, who is currently serving his third separate term as CEO.
Schultz claims that Starbucks has an "extraordinary slate of candidates who are very interested in the job," adding that management has "narrowed it down to a select few." Still, Schultz failed to give a timeline, noting that he plans to "stay as long as necessary."
With the long-term leader for Starbucks uncertain, investors might be scared off until there's a clearer picture as to who will be guiding the company's future.
Will Starbucks stock bounce back?
Coffee is a product that will always be in demand, and considering Starbucks is the behemoth in the world, the company remains well-positioned to benefit for years to come. Still, it has run into some major issues, as outlined here, as well as emerging competition from the fast-growing drive-through coffee chain Dutch Bros. (BROS -0.39%).
Look to the company's upcoming Investor Day on Sept. 13 to see how management looks to overcome its current obstacles. Until then, expect Starbucks stock, similar to its most popular beverage item in the U.S., to be cold.
