Starbucks gets a price target cut after a brutal quarterly miss and light guidance

Published Tue, Apr 30 20249:30 PM EDTUpdated Tue, Apr 30 20249:38 PM EDT

Starbucks shares plummeted Tuesday evening by roughly 11.5% after the coffee giant delivered a much weaker-than-expected quarter. The company also cut its outlook for fiscal 2024, leaving little room for optimism of a quick rebound in traffic at its stores. Revenue fell 2% year over year to $8.56 billion in the fiscal 2024 second quarter, below the $9.13 billion expected by analysts, according to LSEG. Adjusted earnings per share of 68 cents fell 14% year over year, missing the 80-cent estimate. Starbucks Why we own it : Starbucks has one of the most recognizable brands of any restaurant. But over the last few years, operations have been challenged by store inefficiencies and a slow recovery in China. Under CEO Laxman Narasimhan, we think there is a plan in place to unlock growth and improve margins over time. Competitors : Dutch Bros , McDonalds and Dunkin' Donuts Most recent buy : Feb. 14, 2024 Initiated : August 2022 Bottom line We have been saying for weeks to be ready for a miss when it came time for Starbucks to report. We thought the setup was similar to its earnings report a quarter earlier when the entire market knew a miss was coming. When management missed last quarter by 3 cents per share but said it had multiple paths to achieving its earnings growth outlook between 15% to 20%, the stock didn't go down on the news. This quarter was much different. The transitory challenges the company called out last time persisted this quarter. The combination of these ongoing issues with what management said was severe weather and a challenging consumer backdrop led to a steep decline in store traffic that made it too hard to drive margin improvement and a miss that was far greater than anticipated. Some of the shortfall was due to unmet demand, which management is attacking with a plan to unlock capacity and improve the customer experience. But the continued sluggish results here have us wondering if Starbucks alienated too much of its customer base by raising prices too high. It's hard not to be concerned when you see a month-over-month decline in the number of 90-day active members in the United States using the Starbucks Reward loyalty program, which fell from 34.3 million a quarter ago to 32.8 million, though the result was still up 6% year over year. Our understanding is that this is supposed to be the company's most loyal base. Starbucks is dealing with too many headwinds right now and due to the uncertain timing of when it will get past them, the sharp stock decline is one we do not have plans of immediately buying. As a result, we are downgrading our rating to a 2 and cutting our price target to $90, which is about a 25x multiple on the low end of management's new EPS outlook. SBUX YTD mountain Starbucks YTD Quarterly commentary Comparable store sales in North America — a key restaurant industry metric — fell 3%, well below estimates of the 0.5% growth forecasted by Wall Street analysts, according to FactSet. What was most concerning here was that transactions were down 7%, representing a huge drop in people coming to the stores. Ticket was up 4%, offsetting some of the transaction weakness, but price hikes can only take you so far. Challenges related to a more cautious consumer plagued the quarter, but management said severe weather was a major factor too, impacting both U.S. and total company comps by 3 percentage points. Another headwind was from fewer visits from Starbucks' so-called "more occasional customers" which are a frequency step below its most loyal customers. On the conference call, CEO Laxman Narasimhan highlighted three execution opportunities to get the US business back on track. The first is to meet the demand it has across dayparts to drive future growth by investing in new tools and implementing new processes. One solution Starbucks has come up with is its siren craft system, which is already increasing peak throughout by nearly 1 comp point annually in the stores that have it. The company must do better to improve operations throughout and decrease wait times in stores to spur growth, so we were pleased to hear that this was a focus. The second is to launch even more new products while continuing to focus on its core coffee-forward offerings. The third is to reach and provide more value for the occasional and non-Rewards customers. Unlike last quarter where operating margin expansion helped offset some of the comparable store growth softness, profitability contracted 110 basis points from last year, primarily due to deleverage, incremental investments in store partner wages and benefits, and increased promotional activity. However, the company said efficiencies generated through its reinvention plan helped offset some of the deleveraging. In Starbucks' international segment, comparable store sales fell 6% and missed estimates of 0.5% growth. The decline was balanced with a 3% drop in both transactions and tickets. The results in China were worse, with comparable sales falling 11%, with transactions down 4% and tickets down 8%, a result of higher promotional activity as the company deals with rising competition from local players. The street was looking for flat comparable sales in China, according to FactSet. But the results were impacted by more than just the promotional environment. A decline in the occasional customer and changing holiday patterns also weighed on the results. Excluding China, the international segment grew revenue and comps in Latin America, the Asia Pacific, and Japan. Guidance Following the disappointing fiscal second results, the company made several downward revisions to its fiscal year 2024 guidance. The changes were: Total global revenue growth of low single digits from the previous range of 7% to 10%. Global and US comp growth in the range of a low single-digit decline to flat from the previous range of 4% to 6%. China comparable sales are expected to decline by a single-digit percentage versus expectations of low single-digit growth in the second quarter through the fourth quarter. Global net new store growth was tweaked down from 6% to 7%. That's due to slower China store openings, which was revised to 12% growth from 13%. Operating margins are expected to be flat versus previous expectations of progressive expansion. Adjusted EPS growth is expected to be flat to low single digits, down from its previous range of 15% to 20%. (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A Starbucks coffee cup sits on a table at a store in Manhattan, New York City, on Jan. 30, 2024.

Spencer Platt | Getty Images