News

Several analysts have slashed their estimates for Starbucks Corporation SBUX after the leading roaster and retailer of specialty coffee suspended its financial guidance for fiscal 2025. This unexpected move has sparked widespread concerns among investors and analysts, casting uncertainty over the company’s near-term performance.

The global coffee giant has suspended the fiscal 2025 guidance by citing a need for a thorough business reassessment amid the ongoing leadership transition. CEO Brian Niccol emphasized the company's focus on returning to its core values and improving customer experience through a strategic "Back to Starbucks" plan, which aims to reignite growth in the future.

In the past 30 days, earnings estimates for first-quarter fiscal 2025 have been revised downward by 21.8% to 67 cents. In the same time frame, earnings estimates for fiscal 2025 and 2026 have been revised downward by 9.6% and 6.6% to $3.12 and $3.70 per share, respectively.

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Factors Hurting SBUX

Dismal traffic has been a major concern for the company for quite some time across all channels and times of the day, with afternoons being particularly weak. In the fourth-quarter fiscal 2024earnings conference call the company informed that traffic woes persisted in the quarter. Non-Starbucks Rewards members' visits declined, and frequency among Rewards members also slowed in the said quarter.

In fourth-quarter fiscal 2024, global comparable store sales declined 7% year over year. The downside was led by a decrease of 8% in comparable transactions, partially overshadowed by a 2% increase in average tickets. Comparable store sales in the United States dropped 6%, with transactions plummeting 10%. While ticket size increased 4% due to pricing, it was insufficient to offset the volume decline.

Comparable store sales in China decreased 14% due to an 8% drop in the average ticket size and a 6% decline in transactions. The region faced intensified competition, heavy promotional discounting and a weak macroeconomic environment, affecting consumer spending.

The decline in margin is also hurting the company. On a non-GAAP basis, the operating margin was 14.4% in fourth-quarter fiscal 2024, which contracted 380 basis points (bps) from the prior year. The decline was mainly led by deleveraging, investments in wages and benefits for store partners, and heightened promotional activities. However, this contraction was partially mitigated by price increases and improved in-store operational efficiencies.

Increasing competition in international markets, particularly in China, pressures Starbucks’ market share and pricing power.

SBUX Underperforms Industry

Shares of the company have gained 3.3% in the past three months compared with the industry’s rise of 5.2% and the S&P 500’s 6.1% rally.

Price Performance

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A Look at Starbucks’ Valuation

The SBUX stock is trading above the industry. With a forward 12-month price/earnings ratio of 31.73X, it exceeds the industry average. The SBUX stock is priced higher than the broader Retail-Wholesale sector’s 26.4X and the S&P 500’s 22.38X. The company is also currently trading at a premium compared with other industry players like Darden Restaurants, Inc. DRI, Domino's Pizza, Inc. DPZ and Restaurant Brands International Inc. QSR.

P/E (F12M)

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SBUX Long-term Prospects Bright

The near-term challenges are no doubt worrisome for Starbucks. However, the company is leaving no stone unturned to bring itself back on track.

Despite reducing store openings in the near term, Starbucks sees opportunities for long-term store growth, particularly in regions with low store density. Remodels will focus on creating community coffeehouse experiences with improved seating, decor and operational efficiency.

Ongoing investments in Siren Craft systems, Clover Vertica brewers and simplified menus aim to improve throughput times, reduce complexity, and enhance customer and partner satisfaction. Plans to streamline menu offerings, reintroduce coffee condiment bars, eliminate non-dairy milk upcharges and bring back personalized touches like ceramic mugs aim to reconnect with Starbucks’ identity as a welcoming coffeehouse.

Conclusion

SBUX is facing significant near-term challenges, including declining traffic across channels, weak comparable sales in key markets like the United States and China, margin contraction, and intensified competition, particularly internationally. The suspension of the fiscal 2025 guidance amid a leadership transition and downward revisions in earnings estimates for the coming years add to the uncertainty.

While the company's "Back to Starbucks" plan aims to reignite growth through operational improvements, menu simplification and enhanced customer experiences, its premium valuation, trading at a higher P/E ratio than industry peers and the broader market, makes the stock less attractive. Given these headwinds and elevated valuation, investors should avoid SBUX in the near term until clearer signs of recovery emerge. The company currently has a Zacks Rank #5 (Strong Sell).

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