Starbucks presented better-than-feared quarterly results on Tuesday night, sending the coffee giant’s shares higher in prolonged trading. The company is much from out of the woods, however the encouraging market response supports our recent decision to upgrade and buy the stock. LSEG said revenue within the third quarter of fiscal 2024 fell 0.6% yr over yr to $9.11 billion, missing the $9.24 billion analysts were expecting. Adjusted earnings per share of 93 cents fell 6% yr over yr, consistent with estimates, LSEG data showed. Starbucks Why We Own It: Starbucks has one of the crucial recognizable brands of any restaurant. But in recent times, its operations have been challenged by store inefficiencies and a slow recovery in China. In late July, we upgraded our rating to Buy It Here 1 after learning that activist firm Elliott Management had acquired a stake within the coffee giant. We’re big fans of Elliott Management’s work and consider its presence should result in much-needed change. Competitors: Dutch Bros, McDonalds, and Dunkin’ Donuts Last Purchase: July 29, 2024 Start: August 2022 Bottom Line The quarter wasn’t great for Starbucks, but expectations were low after the previous quarter, a debacle that resulted in a 16% plunge the subsequent day. The two most vital things Starbucks needed to do that time around were show signs of improvement in North America and maintain its guidance. It completed each with barely higher sales and somewhat margin compression in its largest region, while reiterating full-year guidance. The management team also argued that its strategic initiatives will turn around operations, pointing to some early successes in stores and thru the app. What Starbucks delivered on Tuesday was just like McDonald’s quarter on Monday. Like Starbucks, McDonald’s had a difficult 2024, and the corporate reported uninspiring results — revenue, existing-store sales, and earnings per share all fell in need of expectations. And yet the stock rebounded on Monday and prolonged those gains on Tuesday because sentiment in these global restaurant stocks was sour. When we saw McDonald’s rise on “bad news,” we took it as an indication so as to add to our Starbucks position, expecting it will trade higher on less bad news too. If shares stop falling on bad news, a bottom could possibly be within the works. And that appears to be playing out on Tuesday, as Starbucks shares rose about 4% in after-hours trading. Now, in fact, meaning Starbucks may have to begin delivering excellent news again after this quarter. While there’s still a protracted strategy to go, we’re encouraged by a few of the early results. We’d still prefer to see prices cut to get more customers into stores. But if there’s an operating setback of some kind, we expect Elliott management to use pressure and be a positive force for change. Analysts at Citi said last week that Elliott’s presence provides a near-term floor for the shares. We agreed, which is why we upgraded our rating to 1 on Monday after this news broke. Looking ahead, we reiterate that rating of 1 and maintain our $90 price goal. Quarterly commentary: According to FactSet, North American comparable store sales – a key indicator for the restaurant industry – fell 2%, easily beating Wall Street analysts’ estimates of two.2%. Usually, a negative comparable is nothing to cheer about. But on this case, it’s an indication of progress after Starbucks posted a 3% decline within the previous quarter. The negative 2% comps were driven by a 6% decline in transactions, one other improvement from the previous quarter’s negative 7%, partially offset by a 3% increase in bills. Importantly, CEO Laxman Narasimhan said the U.S. business is seeing “early success” within the three-part motion plan unveiled last quarter. The plan’s goals are to fulfill and release capability for brand spanking new demand, attract recent customers, drive transaction growth through recent products and reach recent customers by improving the Starbucks experience. A key to management’s program was the Phase 1 rollout of the Siren Craft System, which is designed to enhance in-store operations. In the 1,200 stores which have adopted the system, the corporate has seen incremental improvements in key metrics of performance, throughput, efficiency and reliability, prompting management to roll out the system to all of its U.S. stores this week. That’s excellent news. We’ve never understood why the corporate has been so slow to roll out. We’re also pleased that the corporate was capable of increase its energetic Starbucks Rewards memberships within the U.S. After a sequential decline last quarter to 32.8 million, the corporate’s marketing programs led to the variety of energetic members increasing to 33.8 million in the course of the quarter. In Starbucks’ international segment, comparable store sales fell 7%, falling in need of estimates for a 5.1% decline. This should come as little surprise given the pressure in China, which saw a 14% decline in comparable store sales, even worse than the negative 6.7% consensus estimate on FactSet and the 11% decline within the previous quarter. The Chinese market continues to suffer from cautious consumers and intense competition resulting in price wars. However, management said there was quarter-over-quarter progress in key areas reminiscent of average each day transactions, weekly sales and operating margins. Starbucks’ commitment to China stays undiminished, but Narasimhan said on the conference call that the corporate is within the early stages of exploring strategic partnerships that may benefit its competitive position. Management also pointed to weakness within the Middle East, Southeast Asia and parts of Europe, which it said was as a consequence of misperceptions about its brand. Finally, Narasimhan confirmed that activist firm Elliott Management has taken a stake and is in discussions that he described as “constructive.” Forecast The significant cut in forecast last quarter gave management enough room to operate inside its recent expectations. The key numbers are global sales growth within the low single digits and adjusted EPS growth that’s flat or within the low single digits. FactSet’s current consensus forecast calls for total sales growth of about 2% yr over yr and adjusted EPS growth of 1% yr over yr. (Jim Cramer’s Charitable Trust is long SBUX. A full list of stocks may be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. After sending a trade alert, Jim will wait 45 minutes before buying or selling a stock from his Charitable Trust’s portfolio. If Jim has spoken a few stock on television, he’ll wait 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION PROVIDED ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY AND OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY EXISTS OR IS CREATED BY RECEIVING INFORMATION RELATED TO THE INVESTING CLUB. NO PARTICULAR RESULT OR PROFIT IS GUARANTEED.
On January 30, 2024, a Starbucks store is situated in Manhattan in New York City.
Spencer Platt |
Starbucks presented better-than-feared quarterly results on Tuesday evening, sending the coffee giant’s shares higher in further trading. The company is much from out of the woods, however the encouraging market response supports our recent decision to upgrade the stock and buy it.
- revenue According to LSEG, revenue fell 0.6% year-on-year to $9.11 billion within the third quarter of fiscal 2024, below the $9.24 billion expected by analysts.
- Adjusted Earnings per share of 93 cents fell 6% year-on-year, consistent with estimates, based on LSEG data.
