Starbucks: Has The Star Left The Buck ?
The Coffee Company.
$Starbucks(SBUX)$ will officially be releasing its quarterly earnings on Wed, 30 Oct 2024, after market close.
On Tue, 22 Oct 2024, for the first time in history, it posted its preliminary quarterly results that showed sales fell again as the coffee chain tries to execute a turnaround.
Slumping Sales Analysis.
For the 3rd consecutive quarter, Starbucks’ same-store sales fell.
This quarter’s -7% decline in same-store sales was the company’s steepest drop since the Covid-19 pandemic.
**Same-store sales is a metric used by retail companies that measures the growth in revenue from store locations that have been in operation for at least one year.
The company attributed its soft sales on weaker demand in North America.
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In its home market, its same-store sales decreased -6%.
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Traffic tumbled -10%, despite increased promotions’ frequency (via mobile app) and expanded product offerings.
In China, its 2nd-largest market, same-store sales plummeted -14%.
Starbucks said the decline is due to:
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Intense competition in China.
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Altering consumer behavior. and
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Changing company’s strategy for the market.
CEO Brian Niccol Statement:
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The company had lost track of its identity as a coffee chain.
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The 4th quarter performance is clear that Starbucks need to fundamentally change its strategy to get back to growth.
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And the ‘Back to Starbucks’ plan is the strategy.
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More details will be revealed during the company’s earnings call slated for 30 Oct 2024.
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Aims to reverse the slowing demand, starting with US, its largest market.
Marketing Strategy.
Starbucks has already kickstarted a new marketing strategy to focus on all its customers, not just its ‘loyalty program’ customers.
Additionally, Starbucks will :
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Simplify its “overly complex” menu.
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Fix its pricing.
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Ensure all of its drinks are handed directly to customers.
Incidentally, the above 3 goals have been top complaints from customers & baristas in recent years.
CEO Niccol believe the issues are very fixable and the company have significant strengths to build on them.
Company’s Outlook.
With so much uncertainty at the moment, Starbucks also announced on Tuesday that said it would halt its outlook for FY 2025.
On its weak Q4 sales, Starbucks acknowledged:
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Sluggishness in the US and Chinese market.
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Previous effort to counter sluggishness with revamp menu and frequent promotions have not yielded results in restoring customers’ enthusiasm.
Fringe bonus.
In an effort to shore up investor confidence, the company said its board had approved a dividend increase to $0.61 cents per share from $0.57.
CFO Rachel Ruggeri further added:
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“The company wants to amplify its confidence in the business, and provide some certainty as it drive the turnaround.
Q4 Numbers.
For Q4 2024, the preliminary numbers are:
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Preliminary net sales fell -3% YoY to $9.1 billion vs forecast of $9.38 billion vs $9.37 billion (Q4 2023).
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Preliminary earnings per share (adjusted) : $0.80 vs forecast of $1.03 vs $1.06 (Q4 2023).
Share Price.
As of 22 Oct 2024
On Tuesday :
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Starbucks ended the day marginally higher by +0.38% to end the day at $96.82. (see above)
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Company shares subsequently fell > -3% in extended trading on the announcement.
New CEO, New everything.
Brian NIccol official took on the CEO role on 9 Sep 2024.
He brings with him his wealth of experiences from the food industry :
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$Yum(YUM)$ - home of Pizza Hut, Taco Bell, KFC where he held CEO roles in its various restaurants
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$Chipotle Mexican Grill(CMG)$ where he helped to double Chipotle's revenue and increase profits almost 7x. During his CEO tenure, CMG stock price increased by almost 8x.
His ascension to Starbuck’s CEO role took the market by surprise because Starbucks just had a newly minted CEO Laxman Narasimhan on March 2023.
The CEO transition followed:
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2 consecutive quarters of falling sales.
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Several activist investors with influential stakes are exerting pressures on Management.
In China, business is struggling also due to the rise of local rivals - $Luckin Coffee Inc.(LK)$ and cautious consumer have dented overall sales.
Mitigation Action Plan.
To curb Starbucks’ sales slump, Niccol plans to focus on US market first.
In an open letter released during his first week on the job, he outlined 4 areas to improve:
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The barista experience in taking care of the customers, like the good old days.
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Morning turnaround service. Achieve the balance between serving walk-in customers & online orders.
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Starbuck’s cafes, re-establishing Starbucks as the community coffeehouse.
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Company’s branding.
Wall Street Reaction.
On Tue, 24 Sep 2024, financial institute - $Jefferies Financial Group Inc.(JEF)$ has downgraded the coffee company, as the analyst firm highlighted a number of hurdles in the path of the new CEO.
In his notes, Jefferies’ analyst Andy Barish highlighted :
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Execution of the strategic changes will be challenged as issues like operations, culture, value perception and tech will take time to implement, evolve and fine tune.
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Fiscal 2025 could be a “throwaway” year for Starbucks to focus on reinvesting, stabilizing, and (then) attempting to accelerate business.
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Jefferies think Fiscal 2025 guidance, could be lower than expected.
Against this backdrop, Jefferies downgraded Starbucks:
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To “Underperform”.
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Lowered its price target to $76 from $80.
Echoing similar views, William Blair’s analyst Sharon Zackfia opined that a reality check is needed on the timeline to reinvigorate Starbucks’ profitability, which she suspects is a Fiscal 2026 dynamic.
My viewpoints: (mine only)
Starbuck’s falling sales is all about economics.
When times are bad, rational consumers will “trim the fats” and save every penny for a rainy day. It’s simple good housekeeping, no ?
Honestly when faced with rising food prices, for every salaryman with limited budget, something got to give. It is not hard to imagine everyone would sacrifice a Starbucks coffee over food / meals, right.
Short term headwinds: By reducing discounts & promotion in a bid to rebuild brand equity, Starbucks may become “less attractive” to bargain hunters resulting in further sales fall in the near term.
Starbucks Major Presence Market:
Looking at a 2023 analysis breakdown of the 38,000 Starbucks locations (globally) - by country.
The top 5 countries with the most number of Starbucks outlets :
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USA.
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China.
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South Korea.
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Canada.
Next make a guess.- out of these 5 countries, which are thriving and has low inflation ? World economies have not returned to pre-pandemic level, not with 2 on-going wars at the moment. Where does that leave Starbucks ?
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Do you think the strategies by the new CEO will help turn things around for Starbucks ?
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Do you think Starbucks will recover in FY 2025 or FY 2026 ?
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