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Starbucks Corporation (SBUX) served up a bitter cup of disappointment to investors with its fiscal Q1 2024 earnings report. The coffee chain powerhouse missed analysts' expectations on both revenue and profits, sending its stock into a double-digit plunge of 17% on Wednesday.
For the quarter ended March 31, Starbucks reported adjusted earnings per share of $0.68, significantly lower than Wall Street's consensus estimate of $0.80. Total revenues of $8.56 billion also fell short of the $9.13 billion projected by analysts.
The shortfall marked Starbucks' second consecutive quarter of disappointing results. In January, the company missed Q4 2023 earnings forecasts and trimmed its full-year 2024 revenue outlook amid persistent inflationary pressures and slowing consumer spending.
At the heart of Starbucks' Q1 stumble was an alarming 4% decline in global same-store sales, in stark contrast to expectations of growth. U.S. same-store sales fell 3%, while the China market – a key growth area for Starbucks – saw an 11% plunge.
The widespread sales slump signaled that even a dominant brand like Starbucks is not immune to the impacts of lingering inflation and economic pressures weighing on consumer appetites to spend. The total number of customer transactions dropped by 6% across Starbucks' geographic segments.
In the earnings release, CEO Laxman Narasimhan acknowledged the shortcomings: "This quarter's results do not reflect the strength of our brand, our capabilities or the opportunities we face."
On the earnings call, analysts did not hold back in their critique of Starbucks' performance and dimmer outlook. JP Morgan's John Ivanko described the results as "a real surprise," noting the weakness was "deep and lasted longer than expected."
Ivanko added: "We feel real urgency and even pressure for the team to act, as they openly admit that the results are far below the company's own capability."
Facing that urgency, Starbucks management opted to once again temper its financial guidance for the full fiscal year. The company now expects global revenues to rise in the low single digits, down from its prior guidance of 7-10% growth.
Meanwhile, same-store sales are projected to decline in the U.S. and China for the year versus previous forecasts that called for increases. Earnings per share are now expected to be flat compared to the 15-20% growth initially forecast.
So what is Starbucks plan to reignite sales growth and recapture its historically strong earnings power? In the near-term, management is focused on ramping up efficiency initiatives, including rationalizing general and administrative costs.
Promotions and discounting efforts aimed at retaining customer loyalty will also likely continue, though they risk pressuring profit margins further. Longer-term, Starbucks may need to double down on innovative new offerings and competitive positioning to fend off lower-cost rivals encroaching on its territory.
Another potential headwind is the company's ongoing tussle with unionization efforts at a small but increasing portion of its U.S. locations. Around 4% of domestic stores have unionized so far, resulting in some labor disruptions.
CEO Narasimhan acknowledged the challenges in his prepared remarks: "In a very challenging environment, this quarter's results do not reflect the strength of our brand, our capabilities or the opportunities we face."
For investors, the key question is whether Starbucks' stumbles represent a temporary setback or a longer-term growth obstacle. While the company holds powerful brand equity, its premium pricing may be vulnerable if economic pressures persist.
At its current valuation around $97 per share following the post-earnings plunge, Starbucks trades at a forward P/E ratio of 27x based on tempered earnings estimates. This is a fairly reasonable multiple for a company of Starbucks' quality, but further compression may be warranted if growth struggles extend into future quarters.
Total Score
Strengths
Trading below its fair value
Investors confidence is positive
Upgraded on attractively valued
Pays a reliable dividend
Risk Analysis
Earnings are forecast to decrease
Analysts lowered price target
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