Investors have been feeling bearish on coffee giant Starbucks (SBUX +0.77%) after its latest earnings numbers proved to be unimpressive. The stock has been falling and has hit new 52-week lows.
In what could be a sign that consumers are finally pushing back hard against higher prices, some restaurant chains have recently experienced lower growth than in previous periods, and Starbucks is among them. The concern is that these trends might be here to stay, especially with inflation persisting and interest rates remaining high.
While Starbucks does have a devoted and loyal customer base, its high-priced coffee might be testing just how resilient the business is under extremely challenging economic conditions. Is it in trouble, and is the restaurant stock destined to go lower? Or could this recent sell-off just make for a great buying opportunity?
NASDAQ: SBUX
Key Data Points
Growth rate falls into negative territory
For the first three months of 2024, Starbucks experienced a 2% drop in sales, with net revenue falling to less than $8.6 billion. The company's comparable-store sales were down 4% globally.
What's telling here is that there was a 6% decline in comparable transactions (which was partially offset by an average ticket increase of 2%). This drop in number of transactions might be a bit concerning because it implies that either people are buying less coffee or some consumers have been buying from other, possibly cheaper competitors.
Three months earlier, comparable-store sales were up by 5%, and there was a 3% increase in transactions along with a 2% bump in the average price. The company has been experiencing a slowdown in both North American and international markets.
The decline could, however, also be due to the coffee chain going up against some tough comparables. After all, it has seen multiple years of strong growth for the business, and a slowdown might simply have been inevitable.
SBUX Revenue (Quarterly YoY Growth) data by YCharts.
Starbucks has been keeping its costs under control
Things could have been worse for Starbucks.
- While its earnings declined by 15% to $772.4 million, that was mainly reflective of the lower revenue number and, thus, smaller profit.
- In addition, Starbucks reported a $91 million gain from the sale of assets in the prior-year period. That also gave its comparable numbers a boost compared to the most recent quarter, in which it generated no such gain.
- The company was able to shave 5% from its product and distribution costs.
- Its total operating expenses were flat compared to the previous year.
The key takeaway for investors is that overall, Starbucks did a good job of controlling its costs at a time when demand was poor, which is a sign of good management.
Should you buy Starbucks stock on the dip?
Starbucks' stock now trades at around 20 times its expected future profits, based on analyst expectations. That's lower than where it has traded in the past.
The company's slide in revenue was a bit of a surprise, but it might be premature to panic just yet. The business is still in good shape, and it simply may have set too high a bar for investors given its past results. I'm confident the company can come out with new products that can help get consumers back into its coffee shops.
Investors might need to be a bit patient given the current economic conditions, since it's possible for the stock to go lower in the near term. Starbucks, however, has a strong brand and excellent fundamentals, and it can make for an ideal investment for the long haul.
