Starbucks Falls Short of Earnings and Revenue Expectations

When it rains, it pours. And it rained pretty heavily on Starbucks in the last leg of the year, prompting the company to miss earnings and revenue expectations for its fiscal first quarter.

Financial Performance

Starbucks posted adjusted earnings of 90 cents a share, 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%.

Confidence in the Brand

“Despite headwinds, our brand is very strong, and that coupled with innovation and a relentless focus on our green apron partners form long-term differentiators, along with focused execution on Triple Shot Reinvention, will drive balanced and attractive earnings growth,” said CEO Laxman Narasimhan.

Addressing Challenges

Narasimhan plans to address some of the challenges facing the company in a call with investors.

A Shift in Forecasts

Earnings haven’t fallen short of expectations in the past three fiscal quarters, but many analysts were bracing themselves for disappointment this time around. In the past month, the consensus forecasts for earnings and sales declined by 2.6% and 1.1%, respectively, according to FactSet.

Stock Performance

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.

Starbucks Faces Controversy and Doubt

Introduction

Controversy Surrounding Starbucks

One area where Starbucks has encountered controversy is its response to the Israel-Hamas war. This drew criticism from both sides of the conflict, leading to calls for a boycott of the company. Additionally, some of Starbucks' unionized stores went on strike, indicating dissatisfaction with the company's labor practices. A third-party report, commissioned by Starbucks in response to shareholder pressure, found that while the company did not intentionally engage in an antiunion campaign, its handling of the rise in union activity had resulted in "significant" negative consequences.

Concerns over Chinese Market

Another cause for concern is the potential stagnation of growth in Starbucks' second-largest market, China. While the company reported a 10% increase in same-store sales in China this quarter, there are doubts about its long-term performance. In contrast, total revenue grew by 20% in constant currency, suggesting that growth may be slowing down.

Analyst Perspective

The majority of analysts express skepticism about Starbucks' stock. 62% rate it as a Hold or the equivalent, indicating caution. However, the remaining 38% see the pessimism as an opportunity. Wells Fargo's Zachary Fadem, for instance, believes that the stock's lower valuation has created a better balance between risks and potential rewards. In a recent note, Fadem stated that a potential miss in Starbucks' performance seems already factored into the stock price. He considers Starbucks one of his top picks for the upcoming earnings season and rates it as Overweight with a $105 target.

Conclusion

As Starbucks navigates through controversies and doubts, the company faces both challenges and opportunities. Addressing concerns over its response to labor issues and sustaining growth in China will be crucial. The divided opinions among analysts highlight the uncertainty surrounding Starbucks' future performance. It remains to be seen how the company will overcome its current obstacles and regain investors' confidence.