Starbucks (NASDAQ: SBUX) is a premium brand that has become ingrained in many people’s daily routine. But the company’s recent quarter showed that even the best consumer companies can go through a difficult time. In fact, Starbucks’ recent results were downright dreadful.
Still, the 50-year-old brand has been through tough times before and has always eventually re-emerged stronger. Will history repeat itself, and is now an opportunity for investors? Or is the recent quarter a sign of more-lasting headwinds?
The first revenue drop since the pandemic
The March quarter revealed some worrying numbers. Revenue actually fell 2%, and adjusted earnings per share fell 8%, or 7% in constant currency.
It was the first time Starbucks recorded a revenue decline since the pandemic, and it’s a far cry from the high-single-digit growth the company has forecast as a long-term target.
In fact, the results were so bad, it prompted a lengthy LinkedIn post from Howard Schultz. He left the company and its board in March of 2023 after stepping in as interim CEO and hiring Laxman Narasimhan as the current leader. Narasimhan’s tenure seemed to be going smoothly until last quarter.
In the note, Schultz had both high-level and more-specific commentary. He said the company’s mobile order-and-pay feature needed to be revamped to better serve customers.
But more broadly, he said the company’s go-to-market strategy needed to be “overhauled” with “coffee-forward innovation.” And on a very high level, he suggested senior management and members of the board need to spend more time in the stores and not obsess over financial reports.
Schultz wrote: “The stores require a maniacal focus on the customer experience, through the eyes of a merchant. The answer does not lie in data, but in the stores.”
But it seems to have been doing this already
Schultz’s words would have been more encouraging if the company hadn’t been doing some of these things already. For instance, Narasimhan already suits up and works one shift per month in a Starbucks store.
Furthermore, Narasimhan outlined his medium-term strategic plan for Starbucks last November, called “three shots, two pumps.” The three shots are focused on growth: elevating the brand with innovation, strengthening the digital rewards platform, and expanding internationally.
Meanwhile, the “two pumps” are focused on cost savings, with a plan to unlock $3 billion of efficiencies, as well as continuing to improve differentiated Starbucks’ culture, which Schultz believes is the brand’s biggest advantage.
So it appears that management has already been trying to execute on at least some of the things Schultz proposed. But is there more it could do? Or is management doing too much?
The problems at Starbucks seem fixable
Fortunately, looking back over the quarter and the conference call with analysts, Starbucks’ current problems seem liked they can be remedied.
One of the big reasons for the March quarter miss was harsh winter weather in the U.S., which shaved about 3 percentage points off comparable-store sales (comps). Given that the U.S. saw a 3% decline in comps, the absence of bad weather would have yielded a flat comps rate. That’s not particularly great, but also not a total disaster.
Second, management noted many customers who used mobile ordering in the Starbucks app wound up not completing a purchase, either due to long wait times or a lack of product availability. In particular, it cited the new potato cheddar chive bakes, which were a hit but only available in 2,000 stores. In business, being supply constrained is a much more fixable problem than being demand constrained.
Lastly, management cited strong engagement and adoption among Starbucks’ core rewards members, and total rewards members actually grew 6% in the quarter. However, it also admitted that the “occasional” customer wasn’t coming in as much, likely due to tight finances as the result of higher interest rates and inflation and increased competition.
On that note, Starbucks also saw intense price wars in China, its second-largest market, but chose not to participate in the battle in order to preserve its premium brand. That led to a big traffic decline in that country, but it’s probably the right long-term move.
Upcoming fixes
On the call, Narasimhan described many initiatives Starbucks is pursuing. These include operational improvements to mobile-order-and-pay, which Schultz suggested, and opening up the Starbucks app to non-rewards members this summer, which could make a difference in luring back the occasional customer with tailored offers.
Management also cited an extra $1 billion in cost savings on top of the $3 billion outlined at the investor day last November, which was encouraging. And there was actually much more beyond Schultz’s suggestions, such as a new overnight offering to serve people until 5 a.m.
Meanwhile, the stock has fallen to a multiyear low forward price-to-earning (P/E) ratio.
SBUX PE ratio (forward); data by YCharts.
Starbucks seems like a strong pickup for dividend investors
While recent troubles have caused it to sell off to a multiyear low valuation, Starbucks is an enduring brand. If the company’s troubles prove as temporary as they appear, this is likely to be a good opportunity to pick up shares, with its dividend yield at 2.9%. While management could be proved wrong in the quarters ahead, I would be inclined to buy shares at this beaten-down level, rather than sell.
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Billy Duberstein and/or his clients have positions in Starbucks. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
Starbucks’ Stock Just Plunged. Is Now the Time to Invest? was originally published by The Motley Fool
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