It has been a whipsaw couple of quarters for coffee giant Starbucks (SBUX +0.79%), with news fluctuating between recording-setting revenue one quarter, and significant decline in comparable-store sales the next.
Investors have seen the glass as half-empty recently, with the stock down about 7% since reporting the quarterly decline in comparable-store sales on April 30. The stock hit a 52-week low shortly after the company reported its fiscal second-quarter results.
But I think the market is missing signs of value and has overreacted in the short term, potentially offering patient investors an opportunity to buy shares on sale.
Starbucks' horrible, no good, very bad quarter
Starbucks' second quarter, which ended on March 31, pulled the rug out from under many investors. The company reported a slew of disappointing results. Traffic, revenue, and income were all down:
- 4% decline in comparable-store sales
- 2% decline in consolidated net revenue
- 2.4% drop in GAAP operating margin
- 14% decline in GAAP earnings per share
On the good news side of the ledger was 6% growth in active users for the company's Starbucks Rewards program. The quarter was clearly a wipe-out, and investors responded by selling-off shares. The irony in the market's pessimism is that Starbucks is coming off of a record-setting full year and first quarter.
A more accurate picture of Starbucks
While there is no denying the negative side of the second-quarter numbers, it has to be remembered that Starbucks had set a high bar over the past five quarters; even a very good sales experience would look negative in comparison.
| Time Frame | Same-Store Sales Change (YOY) | Net Revenue Change (YOY) | GAAP Earnings Per Share (EPS) | GAAP EPS Change (YOY) |
|---|---|---|---|---|
| Q1 2023 | 5% | 8% | $0.74 | 7% |
| Q2 2023 | 11% | 14% | $0.79 | 36% |
| Q3 2023 | 10% | 12% | $0.99 | 25% |
| Q4 2023 | 8% | 11% | $1.06 | 39% |
| Full Year 2023 | 8% | 12% | $3.58 | 27% |
| Q1 2024 | 5% | 8% | $0.90 | 22% |
| Q2 2024 | (4%) | (2%) | $0.68 | (14%) |
Data source: Starbucks. Starbucks' 2023 fiscal year ended Oct. 1, 2023.
For the fiscal year ended Oct. 1, 2023, Starbucks saw record-setting consolidated net revenue of $36 billion. Earnings per share and comparable-store sales posted significant gains from the prior-year period.
The results got even better for the first quarter of the 2024 fiscal year (ended Dec. 31, 2024), with another record set for consolidated net revenue.
Comparable-store sales and earnings per share also showed significant strength. Starbucks Rewards showed stellar results once again, with year-over-year growth of 13% in active members. Gift card loads reached a new record, with $3.6 billion loaded, making them the No. 2 holiday gift card in terms of activations. Starbucks notes that Rewards users are its most frequent visitors, so the growing base of members offers further hope for resumed growth in comparable-store sales.
Given these stellar results over the preceding five quarters, it should not have been surprising that second-quarter 2024 results would be susceptible to year-over-year declines. The drop in stock price has only increased the stock's attractiveness as a value-oriented opportunity.
Is the stock a buy now?
Comparing the full-year results with Starbucks' current price reveals a stock that is slightly undervalued compared to current stock market valuations. The stock is trading at a price-to-earnings ratio around 22 and a price-to-free-cash-flow ratio around 25.
While the price-to-earnings and price-to-free cash flow ratios are not indicative of deep value, they do reflect quality operating results and a significant sell-off in share price. Starbucks may have been overvalued before the recent sell-off, but that's clearly no longer the case.
However, the news isn't universally good for value-oriented investors looking at Starbucks. The company has negative book value, with liabilities inflated by long-term debt and lease obligations. Management is committed to growing store count, too, so these debts are unlikely to shrink.
However, the retail industry is notoriously expensive, so it comes as no surprise that Starbucks would have substantial financial obligations. Of greater importance is the fact that the brand has become ubiquitous within the culture. Starbucks is an affordable luxury, or daily necessity, for a huge percentage of not only the U.S. population, but also of the developed world. Management has a history of capitalizing on this reputation and generating substantial positive free cash flow and net income from the stores funded by those long-term obligations.
The company also offers investors a per-share dividend currently paying $2.28 per year, yielding about 2.8% . Despite the substantial dividend, it is well-covered with a coverage ratio of 1.7.
NASDAQ: SBUX
Key Data Points
Besides the solid dividend, cash flow, and net income, the company is barely six months in to a revitalization plan designed to save $3 billion in costs, including $2 billion in outside-the-store costs of goods sold. A significant portion of this savings is expected to come from improved efficiencies in the sourcing, manufacturing, and distribution of its products. These savings should be accretive to free cash flow and earnings per share.
As the market gets over the bad news of the second quarter and resultant sell-off, and more results from the efficiency program materialize, shares will be poised to rise as Starbucks continues generating free cash flow and net earnings. Investors who want to buy a quality stock at a reasonable price should consider adding shares at these levels.
