Investors of coffee giant Starbucks (NASDAQ:SBUX) have had to watch their shares give up almost all of their pandemic fuelled gains since the start of the year. Considering it was only last August when they were hitting fresh all time highs, few would have forecasted the 40% that was awaiting them. But that’s exactly what’s happened, and their shares are back trading at the same levels they spent much of 2019 and 2020 at, with fresh lows having even been logged this week.
Is there a chance that this is where the low is put in? Investors had a chance to think on this last night as the company released their Q2 earnings. Shares popped in response during the after-hours session but there’ll be a lot more needed before this can be called the low. This wasn’t one of those reports that blew the doors down with an earnings smash, indeed EPS was just below the consensus while revenue was in line. But the latter showed growth of 15% year on year, with promising signs of a recovery in the Chinese market. Comparable store sales around the world were up 7% on the year, and 12% in the US alone. Active Starbucks Rewards Membership in Q2 popped 17% in the US, while 313 new stores were opened.
Potential Growth Story
Howard Schultz, interim CEO had this to say with the report; “we are single-mindedly focused on enhancing our core U.S. business through our partner, customer and store experiences. Given record demand and changes in customer behavior we are accelerating our store growth plans, primarily adding high-returning drive-thrus, and accelerating renovation programs so we can better meet demand and serve our customers where they are. The investments we are making in our people and the company will add the capacity we need in our U.S. stores today and position us ahead of the coming growth curve”.
CFO Rachel Ruggeri struck a similarly positive tone when she added that “we are confident that the investments in our partners, our stores, and our brand that we announced today will deliver returns in excess of historic levels and accelerate our growth long into the future.” For now at least, it looks like Wall Street is happy to start dipping the toe into the growth potential, as it’s not that long since Starbucks was held aloft as a beacon of how well a consumer staple can pivot in a pandemic. The company certainly knew how to navigate that difficulty, but they’re facing fresh headwinds now which will test them again.
Soaring inflation and the associated rising costs are hurting their margins, while persistent COVID related lockdowns in China are putting a brake on sales in what is their second-biggest market. In addition, unionization efforts in the US have made the bulls case that much harder. It was only last week that Wedbush urged caution to any would-be investors in the coffee house chain.
Nick Setyan and the team there were less than enthusiastic about Starbucks’ earnings prospects and advised that “there remain many factors out of management’s hands at present. This includes lockdowns across China, a key growth market for the Seattle-based coffeehouse chain, and unionization efforts that are gaining momentum. The bright side is that U.S. top line momentum likely continues. On the other hand, global headwinds continue, and the Russia/Ukraine crisis only reinforces questions regarding the long-term viability of Starbucks’ commitment to China.”
This should be enough to give most of us pause for concern, as it's more important than ever that equity investors are picky with their buys. We’ve seen enough headlines in recent weeks about how this is the worst start to a year in decades for stocks, and a company that is missing on its earnings and revenue is a tough buy right now.
Setyan and his team also noted that margin headwinds from adverse inflation and supply chain dynamics as well as the expectation of guidance cuts hang over the stock heading into the rest of the year. They rated Starbucks as Neutral, and cut their price target to $81. That suggests there’s a little bit of room to the upside, but it will hardly be enough to start a rip roaring rally. In short, there’s potential for a recovery if the headwinds dissipate, but there’s no need to back the truck up just yet.
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Article by Sam Quirke, MarketBeat