Starbucks is not worth buying at a premium!
As the $S&P 500(.SPX)$ continues to soar to record highs, investors are left asking a crucial question: how should we position our portfolios to cushion against potential downturns? Even struggling giants like $Starbucks(SBUX)$ are trading at inflated valuations.
Starbucks has been facing some tough challenges lately. In the U.S., its competitor $Dutch Bros Inc.(BROS)$ is snatching market share with faster drive-thru options and simpler menus. Globally, Starbucks is also up against the "third wave" coffee roasters that are gaining traction both in the U.S. and abroad.
The Downward Trend
Let’s take a look at what’s really hurting Starbucks: weak comparable sales. This metric, which measures revenue growth excluding new and closed stores, is concerning.
The company is projecting a low single-digit decline in global comparable sales, particularly struggling in the Chinese market. To combat this, Starbucks plans to open more stores, targeting a 12% increase in China by the end of fiscal year 2024.
In North America, comparable sales dropped by 2% last quarter. Stripping away the impacts of price increases and product mix—which added 3 percentage points to annual revenue growth—transaction volumes were even weaker, down 6% year-over-year.
The overseas results are worse, with comparable sales declining by 7%. A strong dollar is further squeezing revenues due to poor foreign exchange rates.
Shockingly, overseas operating margins fell by 340 basis points to 15.6%, performing worse than North America.
In short, with a brand that's facing significant misunderstandings, Starbucks' issues are unlikely to resolve quickly.
What’s the Value of the New CEO?
Despite these deep-rooted challenges, the market seems to view the appointment of new CEO Brian Niccol as a magic bullet. Since his hiring announcement on August 14, Starbucks' stock has surged over 25%, adding about $22 billion in market value. But is this new leadership really worth that much?
Niccol's track record at $Chipotle Mexican Grill(CMG)$ is impressive; since he took over in March 2018, the stock has skyrocketed by over 800%, while the S&P 500 has only doubled during the same period.
However, the Chipotle Niccol inherited in 2018 is nothing like the Starbucks of today. Starbucks is a larger, more complex giant that is no longer a straightforward growth story but rather an established player facing disruption.
Given that many customers want to customize their handcrafted drinks, Starbucks might be even more complicated than Chipotle, making full automation a challenging priority.
Conclusion
While it’s hard to downplay Brian Niccol's stellar record at Chipotle, he’s now dealing with a Starbucks that faces significant global challenges—and the stock has already jumped to celebrate his arrival.
For fiscal 2025, Wall Street optimistically expects Starbucks to achieve 7% revenue growth, reaching $39 billion, with adjusted earnings per share projected at $3.96 (up 11% year-over-year).
This puts Starbucks’ P/E ratio for 2025 at 24.0, which is still above the S&P 500—even as the company faces numerous headwinds and its current earnings shrink in the mid-single digits.
If Niccol is to turn this coffee giant around, it will take time.
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