Starbucks stock has been struggling since April 2023, when falling U.S. consumer spending led to weak demand and disappointed investors. Before yesterday’s jump, Starbucks shares had lost 36% of their value in that time frame. Consumers are likely starting to cut back on their afternoon coffee purchases (or at least make their own), expressing their fatigue with steadily rising prices.
Starbucks' sales for the quarter ending June 2024 once again disappointed investors, although not as much as feared. Although sales were down from a year ago, key financial data came in better than investors had expected. The company reported adjusted earnings per share (EPS) of $0.93 versus expectations of $0.92, leading to a 6% increase in the stock price. However, the rally proved short-lived, and within two sessions the stock price fell to the level it had before the earnings were released. More detailed data from the United States also showed a 2% drop in sales, while footfall fell by 6%.
Analysts say the headwinds facing Starbucks could be related to broader, cyclical macroeconomic factors that could lead to weaker sales for most of fiscal 2024. The 2024 guidance has already been revised down for the third time this year. The company said it expects global revenue growth in 2024 to be in the low single digits, down from its previous guidance of 7% to 10% (which had already been lowered from its original estimate of 10% to 12%).
Starbucks brand sales fell not only in the United States, but also in its second-largest market, China. The Middle Kingdom saw the biggest decline of all regions. Sales at stores alone fell 14% from an 11% drop in the previous quarter. Both footfall and average transaction value in China fell 7%. The company attributes the decline to increased consumer caution and increased competition over the past year.
Starbucks isn’t the only consumer discretionary stock to suffer from consumer discretion. Over the past 12 months, consumer discretionary stocks have underperformed the broader S&P 500 by 15 percentage points, or more than three times (21.74% for the S&P 500 vs. 6.72% for the S&P 500 Consumer Discretionary). Meanwhile, the gap between the two indexes’ year-to-date performance is even wider: 13.93% for the S&P 500 vs. 0.73% for the S&P 500 Consumer Discretionary.
Elliott Investment Management has been pushing Starbucks to make some changes amid declining sales. Brian Niccol may be the face of those adjustments the investor had in mind. Niccol previously served as CEO of Chipotle, after working at Taco Bell. Under his leadership, Chipotle’s stock price has surged a mind-boggling 773%. He played a key role in helping the chain emerge from a foodborne illness crisis and successfully steered the company through the pandemic. Recently, while many other restaurant chains have faced significant revenue declines, Chipotle has seen traffic and sales rise, bucking the trend.
Under Niccol, one of Chipotle’s key strengths was its mobile app, which was a major contributor to the company’s strong performance in recent quarters. In contrast, Starbucks’ app has been criticized for disappointing results. Former Starbucks CEO Howard Schultz and other critics of the company have pointed to an excessive amount of mobile ordering, which leads to delays in service and a negative impact on the customer experience.
The jump in Starbucks stock suggests that investors may have faith in Brian Niccol and his ability to turn around the company's recent troubles. Coupled with his success in driving Chipotle's stock up 773%, investors may be willing to buy into a new "Starbucks success" project while its shares are still trading below $100.
While investors already holding Starbucks stock were certainly pleased to wake up Tuesday morning to a share value increase of about 20%, let's take a look at the critical valuation metrics to understand whether it would still be a wise purchase.
When Starbucks shares were losing value over the past year, their valuation multiples were lower than the average multiples of companies in the S&P 500 Consumer Discretionary Index, suggesting they were attractive. However, after the current rally, Starbucks shares no longer look so good. Both their price-to-earnings (P/E) and price-to-earnings (P/P) ratios are now slightly above the sector average.
Another valuation multiple, price to book value, was not calculated because the company had accumulated a large debt load, leading to a book value of $8 billion and negative equity. The huge debt load may also be a reason to think twice before investing in Starbucks stock.
What's more, often such gaps in the prices of stocks and other financial instruments tend to close over time, meaning that once the initial buzz around the new CEO dies down, Starbucks' stock price could fall to pre-announcement levels.
Brian Niccol could be the breath of fresh air Starbucks needs after changing CEOs for the fourth time in two years. His past performance at similar companies suggests that Starbucks could soon see positive changes, including a rise in its stock price.
However, the company in question operates in a relatively saturated market with numerous and cheaper competitors. It also faces challenges related to customers who are willing to give up another cup of expensive coffee. Moreover, Niccol may face other tasks related to the company itself, because it has a more complicated structure and a much more extensive international exposure than Chipotle.
It may be interesting to see if the new CEO will attempt to reduce the amount of debt Starbucks has incurred in the past. However, for now, the negative equity value may be a reason why some investors decide not to invest in Starbucks stock.
What’s more, the company still needs to stop falling sales and profitability metrics to improve its appeal to investors. Until that happens, the arrival of a new CEO may not be enough reason to invest in a company whose shares have just jumped 24 percent.
