SBUX - Starbucks: Long-Term Tailwinds But Choppy Near-Term Recovery - Hold

2024-05-21 15:51:18 ET

Summary

• Near-term headwinds and consecutive downward revisions to guidance have contributed to recent stock price weakness.
• Although the long-term strategic plan is sound, it is expected to take time to yield results.
• In the immediate future, without a clear catalyst and with indications of additional near-term challenges, the market will likely remain on the sidelines.

Investment thesis

Starbucks ( SBUX ) holds a dominant position in the growing and attractive coffee market. Yet, the company is facing significant near-term headwinds across geographies, resulting in disappointing Q2 results . This has sparked discussions among investors about whether the stock's decline presents a buying opportunity. However, several factors may still suggest potential downside risks. These include: (1) consecutive downward revisions to short-term guidance, with EPS for FY24E now expected to be flat to low-single-digits compared to the +15% to +20% in Q1; (2) significant EPS miss of -15% in Q2, the worst performance in the recent past; and (3) management comments that the near-term will remain choppy across geographies, with expectations of Q3 results still posing challenges. While corrective actions are being taken, these are expected to take time to yield results, particularly given the soft macro backdrop and impact on discretionary consumption in key markets such as the US and China (comps guidance of low-single-digit decline to flat and single-digit decline, respectively). Although Starbucks' long-term strategic plan, "Triple Shot Reinvention", is sound, it may also require time to fully realize its benefits. Looking further ahead, I believe the brand will maintain relevance in the specialty coffee segment and unlock value in new markets. However, in the immediate future, without a clear catalyst, I believe the market will remain on the sidelines. Until investors have better visibility on progress and an improvement in the consumption environment, these factors may prevent a re-rating from materializing.

The largest retailer of specialty coffee in the world

Starbucks is the largest retailer of specialty coffee in the world, offering an array of teas and assorted beverages (74% of sales), as well as a variety of food items (22% of sales) sold through company-operated stores. The company also distributes its coffee and tea products and licenses its trademarks through other channels, including licensed stores, grocery and foodservice, facilitated by a Global Alliance with Nestlé. The network encompasses 38,951 stores (52% company-operated and 48% licensed) across 86 markets, with the United States and China being the most relevant countries (43% and 18% of the network, respectively), while all other regions account for less than 5% of the total network....

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