On Tuesday, Starbucks (NASDAQ:SBUX) is set to release its third-quarter earnings report and investors are already bracing for another bitter quarter as the coffee chain continues to be plagued by slow traffic, heavy promotions, along with higher wages and input costs that are weighing on profits.
Last quarter, the stock took a nosedive when the company announced that comparable-store sales were down 4%, transaction counts were down 6%, and that earnings and sales had also been hit by what CEO Laxman Narasimham politely called a “highly challenging environment.” The results took investors by surprise, and by the next day, the stock had fallen as much as 18% and set a new trading range below $80 a share.
The dramatic sell-off in the stock was brewing long before the fiscal second quarter, as Wall Street expectations were based on management's overly optimistic forecasts. Or maybe it's the “value proposition” that Starbucks (SBUX) continues to celebrate at a time when a $6 grande espresso with oat milk and brown sugar is considered an indulgence in a compromised economic environment. A week after the fiscal second-quarter debacle, founder Howard Schultz called on the company to own up to its mistakes and take a “maniacal approach to customer experience.”
Seizing the opportunity to cash in on the falling share price, activist investor Elliott Management revealed that it owns a “sizable stake” in the company. While it is too early to tell what Elliott’s strategy is for cashing in on the decline, the company will most likely try to get board seats and push for a leadership change. That almost certainly means a protracted fight with the current board and with Narasimham, Schultz’s hand-picked successor.
“We have no confidence in the ability or willingness of the current management team to implement drastic measures to save this sinking ship,” Hedgeye Risk Management said, adding that “Starbucks’ operational labyrinth is spiraling out of control and the road to recovery appears treacherous and protracted.”
More immediately, CFO Rachel Ruggeri’s comments in Deutsche Bank Access’ 2024 Global Consumer Confidence Report could signal another troubled quarter. Ruggeri admitted that the company’s relationship with its customers had “deteriorated” and that “we expected those headwinds to persist in the second quarter, but they persisted even longer than we expected,” a sentiment echoed by the company’s CEO. In other words, get ready for another tough quarter.
So what can investors expect on Tuesday? Seeking Alpha data shows that there have been 31 downward revisions to FY24 earnings and 28 downward revisions to revenue, with no upward revisions for either. The consensus estimate is for the company to report earnings of $0.93 per share, down 7% from the same quarter last year. Revenue is expected to have increased less than 1% to $9.25 billion.
“Taking into account Rachel Ruggeri’s words, I personally don’t see any signs that Starbucks has been able to grow its revenue. Therefore, given the obvious decline in traffic and the likely decrease in average tickets due to ongoing promotions, I expect Starbucks to report $9.1 billion in revenue, a 0.7% decrease year-over-year,” said Seeking Alpha investor Luca Socci.
Socci also expects Starbucks to continue pausing buybacks to conserve cash, while keeping the share count unchanged, which he believes will result in EPS of $0.72, flat to Q3 2022.
Another Seeking Alpha investor, Yuval Rotem, echoes Socci’s concerns about the upcoming quarter, pointing to comparable sales as the harbinger of poor performance. “When comparable sales fall for the first time in years, multiple concerns arise,” Rotem says, adding, “investors have 2% to 6% annual growth in their expectations… and when a company fails to deliver, especially when its competitors are succeeding (like Dutch Bros (BROS) with 10% comparable sales), it’s a sign of market share loss.” Additionally, opening new locations “becomes less profitable or attractive when existing locations are struggling,” he adds.
Heading into Tuesday, Wall Street will be watching to see if Starbucks (SBUX) continues to hold back its profitability forecasts and expectations. Last quarter, the company acknowledged lackluster sales and lowered its global revenue growth forecast to low single digits from the previous forecast of a 7-10% increase. Comparable sales growth is also expected to be at a low single digit rate or flat versus +4% to +6% previously. From its previous forecast of a “progressive expansion” in its operating margin, the company now expects operating margin to remain flat. There’s not much room to go lower than that, or is there?
