The success of Starbucks (SBUX -1.15%) since it went public in 1992 has delivered outsized returns and likely made some small investors millionaires. Over a half-century, this one-time coffee-bean shop has grown into a restaurant powerhouse with about 35,000 locations worldwide.
Nonetheless, it faces considerable struggles in growing beyond its current level, and some issues have received little attention. Investors need to evaluate such challenges before considering a position in Starbucks stock.
Howard Schultz is a blessing -- and a burden
Many investors probably sighed with relief in March when Howard Schultz returned as Starbucks' interim CEO. While not technically the "founder" of Starbucks, as the website states, he is the leader that transformed it from a Seattle coffee-bean shop to a worldwide cafe operator.
Nonetheless, Schultz is now on his third stint as the company's CEO. He stepped down for the first time in June 2000. Thus, more than 22 years after his first tenure as CEO ended, the company has failed to move on from Schultz. Moreover, since he has left the position twice and now calls himself the "interim" CEO, one could reasonably assume he doesn't plan to stay in that job.
This should concern investors. Given the need for him to return, one has to wonder if Schultz built a company that only he could run. Both of his returns occurred after working conditions deteriorated, a problem that received added attention last year when some employees began to unionize. While he may get the company back on track, the inability to find a CEO as successful as Schultz should worry long-term investors.
Moreover, a crucial part of Schultz's expansion strategy has come under fire. With Starbucks at a saturation point in the U.S., Schultz pivoted toward China, pinning much of the company's store-count growth in recent years on that country. Now, China is its largest non-U.S. market with almost 5,800 locations.
However, China recently experienced a new round of COVID-19-related lockdowns. Consequently, China's comparable-store sales fell 44% in the latest quarter. This cut the company's operating margins by 910 basis points during that time.
Furthermore, U.S.-China relations have deteriorated in recent weeks with House Speaker Nancy Pelosi's visit to Taiwan. While it's premature to speculate on how this might affect Starbucks, it could place a cloud of uncertainty over Starbucks' expansion strategy in China if the political situation worsens.
Additionally, its U.S. operations could continue to struggle. Starbucks has had to absorb higher commodity and supply chain costs. Also weighing on the company's financials were an end to temporary subsidies, and increased costs for labor and benefits. Had the average ticket not grown by 8% year over year in the U.S. market, revenue would have likely fallen.
Moreover, while consumers seem to have absorbed rising prices so far, they too have faced 8.5% inflation over the last year. Those rising prices could reduce the disposable income needed to drive sales. Furthermore, the expansion of Dutch Bros across the U.S. and the competitive threats from Dunkin' and numerous independent coffeehouses remain. Such challenges may make Starbucks' price-to-earnings ratio of 25 more difficult to justify.
Should I consider Starbucks?
Despite the power of its brand, Starbucks' business appears to face a considerable level of uncertainty. Admittedly, almost every commodity-dependent company now deals with issues regarding labor, supply chains, and inflation. Moreover, if U.S.-China relations break down, Starbucks will be far from the only global company to suffer.
But a major concern for the coffee stock is still Howard Schultz. While companies typically benefit from such a leader, they can suffer long-term without the ability to hand off power. The fact that 22 years was not enough time to find such a leader should concern stockholders.