Expectations for Disappointing Results
Starbucks is set to release its fiscal first-quarter earnings report, and Wall Street is anticipating a negative outcome. Analysts are predicting earnings of 93 cents per share from $9.6 billion in revenue, with same-store sales projected to rise by 7.1%, based on FactSet consensus estimates. The results, covering October through December, will be announced on Tuesday afternoon.
Concerns Over Declining Forecasts
Although Starbucks’ earnings have met expectations in the previous three fiscal quarters, many analysts are preparing for disappointment this time around. Recent consensus forecasts have declined by 2.6% for earnings and 1.1% for sales. Third-party data also suggests that sales growth has slowed compared to the same quarter last year, as visitor numbers to the stores decreased by 2.1% from the previous year.
Skepticism and Stock Performance
Over the past few months, skeptics of Starbucks’ stock have gained confidence due to certain factors. While the S&P 500 experienced an 11% gain from early October to January 1, Starbucks stock only saw a 5.4% increase during the same period. The stock also faced a 12-day losing streak during the quarter, resulting in a loss of over $10 billion in market capitalization.
Recent Challenges Faced by Starbucks
In October, Starbucks faced criticism for its response to the Israel-Hamas war, leading to calls for a boycott from both sides of the conflict. A month later, some unionized stores went on strike, adding to the company’s challenges. In December, a third-party report commissioned by Starbucks found that while the company did not purposefully engage in an anti-union campaign, its response to the increase in union activity was mishandled, resulting in significant negative consequences.
The growth trajectory of Starbucks, particularly in China, has become a subject of controversy among investors. While some argue that the company’s expansion in China is losing momentum, others see the current pessimism as an opportunity.
Andrew Charles, an analyst at TD Cowen, suggests that Starbucks might revise its forecast for same-store sales growth in China, given the complexities involved in establishing a turnaround in this market. Charles rates the stock as Market Perform with a price target of $102.
According to analysts’ opinions, 38% of them have a Buy rating on Starbucks, while 62% rate it as Hold or equivalent.
On the bullish side, Zachary Fadem from Wells Fargo believes that the stock’s lower valuation has rebalanced the risk-reward ratio and that any potential negative impact is already factored into its price. Fadem considers Starbucks one of his top picks for the upcoming earnings season, rating it as Overweight with a $105 target.
Sharon Zackfia from William Blair also shares an optimistic outlook. Despite recent challenges such as union walkouts and boycotts, Zackfia believes that the underlying health of Starbucks’ U.S. business remains relatively strong. Additionally, she expects the company to affirm its guidance for fiscal 2024, paving the way for sustained long-term growth. Furthermore, Zackfia predicts that recent efforts to streamline store operations and enhance working conditions for baristas will have a positive impact on sales and productivity in the United States over the next few years. She has an Outperform rating on the stock but has not assigned a specific price target.
In conclusion, Starbucks’ growth prospects remain a topic of debate. While concerns exist regarding its performance in China, others see an opportunity for investors due to its favorable valuation. Analysts like Fadem and Zackfia highlight various factors that could contribute to future growth, both domestically and internationally.