When it rains, it pours. And it rained pretty heavily on
Starbucks
in the last leg of the year, prompting the company to miss first-quarter earnings expectations and lower its revenue guidance for the rest of the fiscal year.
Starbucks posted adjusted earnings of 90 cents a share for its first fiscal quarter, below expectations for 93 cents a share, according to FactSet.
Sales rose 8% year over year to a record $9.4 billion, but fell short of consensus estimates for $9.6 billion. Same-store sales rose by 5%, below expectations for 7.1%.
The company also trimmed its outlook for fiscal 2024 to reflect the soft performance in the first fiscal quarter, which has carried into January. Total sales will now grow between 7% and 10% year-over-year, down from a previous range of 10% to 12%. Same-store sales will rise by 4% to 6%. Past guidance was for 5% to 7% growth.
Guidance for earnings, operating margin, and store growth was unchanged.
“We are confident that the business pressures we experienced in the first quarter are transitory,” said Rachel Ruggeri, Starbucks chief financial officer.
The past couple of months have given skeptics on the stock plenty of reason for confidence. From early October to Jan. 1, Starbucks stock has gained 5.4%, underperforming the
S&P 500’s
11% gain during the same period. At one point during the quarter, the stock went through a 12-day losing streak that wiped out more than $10 billion in market capitalization.
There were several unexpected factors that impacted the company’s performance, management said.
In October, Starbucks came under heat for its response to the Israel-Hamas war, prompting boycott calls from both sides of the conflict. The war in the Middle East negatively impacted the company’s sales in the region, said CEO Laxman Narasimhan on a call with analysts Tuesday. It also dragged on foot traffic in the U.S., he added, as consumers pulled back on spending—especially customers who pop in for the occasional afternoon treat.
The company responded by launching targeted promotions, advertising campaigns, and new products to tempt consumers to come back into stores, but it will take some time for those efforts to pay off, Narasimhan added.
Starbucks’ ongoing struggles with its union also spilled over during the quarter. Some of the company’s unionized stores went on strike in November. And in December, a third-party report—commissioned by Starbucks in response to shareholder pressure—found that while the company didn’t purposely engage in an antiunion campaign, it had bungled its response to the rise in union activity, resulting in “significant” negative consequences.
On Tuesday, Narasimhan gave investors a long-awaited glimpse into his stance on unionization.
“We believe in a direct relationship with our partners,” Narasimhan said. “And in the 4% of our stores in the US, when our partners have chosen to be represented by a union, we are committed to finding a constructive path forward with those unions.”
Bears also point to ongoing challenges in China, Starbucks’ second-largest market. China is still a key market for Starbucks, management said, but they acknowledge the recovery was slower than expected. Same-store sales in China grew by 10% this quarter, driven by a 21% increase in transactions. Fiscal-year sales in the country will grow by low-single digits, a slower rate of growth than the 4% to 6% the company expected before.
“Starbucks faces a more difficult environment in China, where depressed consumer confidence and deflationary pressures have enabled lower-cost competitors like
Luckin Coffee
to gain share,” said Rachel Wolff, senior analyst at Insider Intelligence.
On their end, the bulls say the pessimism presents an opportunity.
Wells Fargo’s
Zachary Fadem believes the stock’s lower valuation has improved the balance between risks and potential rewards.
“A SBUX miss seems priced in & we like the ‘24 setup from here,” he wrote in a note last week. Starbucks is one of his top picks for the coming earnings season. He rates it Overweight with a $105 target.
The market seemed to side with Fadem on Tuesday. The stock jumped 5.1% to $98.94 in Wednesday’s premarket trading.
“We think the positive stock reaction thus far is likely attributable to ‘better-than-feared’ results as sentiment into the print was fairly negative,” said Matthew Goodman, analyst at M Science.
Also bolstering the bull case is the fact that the company’s adjusted operating margin grew 1.4 percentage points from a year earlier to 15.8%. The gains were driven by operational efficiencies Starbucks has achieved via a multiyear Reinvention Plan, including equipment innovation and scheduling improvements, the company said.
Starbucks’ loyalty program is also still going strong. The number of active members jumped 13% from a year earlier to 34.3 million. Rewards members visited their local cafes more often and spent a record amount this quarter, the company said.
Write to Sabrina Escobar at [email protected]
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