Starbucks (SBUX 0.19%) just had one of the worst weeks in its history.
The global coffee chain experienced its largest post-earnings stock price decline since 2000. It reported falling comparable sales and slashed guidance for the year, and management offered little more than empty buzzwords as a plan to stem the slide.
Globally, comparable sales were down 4% in the fiscal second quarter, including a 6% decline in transactions. There didn't seem to be a geographical bright spot for the company, either. North America and U.S. comparable sales fell 3%, including a 7% comparable sales decline, and China comps were down 11%. Starbucks has long touted China as its top growth market, so those results are especially disappointing, especially as the company was experiencing growth in all major markets just a few quarters ago.
Overall revenue was down 2% year over year to $8.56 billion, which badly missed estimates of $9.13 billion. Bottom-line results were also disappointing. Adjusted earnings per share fell 8% year over year to $0.68, below the $0.79 consensus.
Looking ahead, the news was even worse. Starbucks slashed its EPS guidance for the year from 15%-20% growth to a range of flat to up by low single digits. It also cut its revenue forecast from 7%-10% growth to just low single digits.
The stock plunged on the news, given that the results were clearly a disappointment to investors. More importantly, does the sell-off present a buying opportunity? Or does it affirm that the problems are long-term and more intractable than management thinks?
Image source: Starbucks.
What's eating Starbucks
There are a number of failures at Starbucks, as the recent report makes clear.
First, it's unusual for a business as big and established as Starbucks to cut profit growth guidance from 15%-20% to nearly flat in one quarter. That kind of abrupt change might be understandable if the economy was crashing or there was another black swan event like the pandemic, but that's not what's happening. The economy is relatively stable, and a global business like Starbucks should be diversified enough to absorb local challenges in a market like China, where the economy has been weakening for a couple of years. Either management badly overestimated the company's earlier growth rate, or Starbucks is experiencing a customer exodus that's unique to its brand.
CEO Laxman Narasimhan said the company was operating in a "highly challenged environment," but Starbucks' peers aren't having the same problems as it is.
Starbucks doesn't have a perfect analog in the global market, but McDonald's, another global quick-service giant, posted a perfectly fine 1.9% growth in comparable sales in its first quarter. Domestic chains are also faring well. Chipotle Mexican Grill, which arguably caters to a similar customer base as Starbucks, continues to post strong growth in the U.S. market, with overall comp sales up 7% in its first quarter.
Those results show that Starbucks' challenges look more internal than management seems to think.
The company said that visits from occasional customers were down, and it touted its Triple Shot Reinvention with Two Pumps strategy, which includes elevating the brand, scaling the digital business, accelerating new store growth, and implementing up to $3 billion in cost savings.
Those are valid goals, but Starbucks seems to have lost its focus on the basic operations that keep customers satisfied and coming back.
Is the stock a buy?
A number of things need to happen at this point for Starbucks stock to be a buy. One of those things is a return to comparable sales and profit growth, which could involve a large rebranding undertaking, especially after a unionization push that led the company to shut down some U.S. stores. However, there's another more pressing issue investors should be focused on.
Narasimhan has led Starbucks for only about a year, but he appears to be on the hot seat with the business now shrinking. Narasimhan was successful as CEO of Reckitt Benckiser, the consumer products company that owns brands such as Lysol, but he'd never run a restaurant before, which could be part of the problem.
Starbucks has seen its brand strength fade before, when the wrong CEO was at the helm, and the brand got away from its core focus on coffee. In the past, Howard Schultz, who is effectively the modern company's founder, has had to come in and right the ship.
Starbucks may need Schultz to come to the rescue once again as the brand appears to be drifting away from its core mission. The coffee chain is big enough that its competitive advantages won't erode easily, but this is a complicated company, and the bigger it gets, the harder it is to run.
Without any clarity about a turnaround, Starbucks isn't a buy right now. I expect the company will eventually overcome the current challenges, but that might require a different leader at the helm, and the process could take years to play out.
Starbucks needs to do a lot of work to fix the business, and it's unclear if management is clear-eyed about the challenges facing it.
