Starbucks served up better-than-feared quarterly results Tuesday night, sending shares of the coffee giant higher in extended trading. The company is by no means out of the woods yet, but the encouraging market reaction supports our recent decision to upgrade and buy the stock. Revenue fell 0.6% year over year to $9.11 billion in the fiscal 2024 third quarter, missing the $9.24 billion expected by analysts, according to LSEG. Adjusted earnings per share of 93 cents fell 6% year over year, matching estimates, LSEG data showed. 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. In late July, we upgraded our rating to a buy-it-here 1 after learning that activist firm Elliott Management took a stake in the coffee giant. We’re big fans of Elliott Management’s work and believe its presence should lead to much-needed changes. Competitors : Dutch Bros , McDonalds and Dunkin’ Donuts Most recent buy : July 29, 2024 Initiated : August 2022 Bottom line Starbucks’ quarter wasn’t a great one, but expectations were low after the previous quarter , a debacle that led to a 16% plunge the next day. The two most important things Starbucks needed to do this time were show signs of improvement in North America and maintain its outlook. It delivered on both with slightly better sales and small margin compression in its largest region, while the full-year outlook was reiterated. The management team also made the case that its strategic initiatives will turn around operations, citing some early success it has had in the stores and on the app. What Starbucks delivered Tuesday resembled McDonald’s quarter on Monday. Like Starbucks, McDonald’s has had a challenging 2024 and the company reported uninspiring results — missing on revenues, same-store sales, and earnings per share. And yet, the stock rallied on Monday and added to those gains on Tuesday because sentiment in these global restaurant stocks was washed out. When we saw McDonald’s rally on “bad news,” we took it as a sign to add to our Starbucks position on the expectation that it would also trade higher on less-bad news. When stocks stop going down on bad news, a bottom could be in the works. And that seems to be playing out Tuesday as Starbucks shares are up roughly 4% in after-hours trading. Now, of course, that means Starbucks needs to start delivering good news after this quarter. While there is still a long way to go, we are encouraged by some of the early results. We’d still like to see pricing come down to spur more traffic at stores. But if there is an operations setback in any form, we expect Elliott Management to apply pressure and be a positive force of change. Analysts at Citi said last week that Elliott’s presence provides a near term floor for shares. We agreed, which is why we upgraded our rating to a 1 the Monday after that news broke. Looking forward, we reiterate that 1 rating and maintain our $90 price target. Quarterly commentary Comparable store sales in North America — a key restaurant industry metric — fell 2%, slightly beating estimates of a 2.2% drop forecasted by Wall Street analysts, according to FactSet. Usually, a negative comp is nothing to cheer about. But in this case, it’s a sign of progress after Starbucks posted a 3% drop in the previous quarter. The negative 2% comps were driven by a 6% decline in transactions, another improvement from last quarter’s negative 7% result, partially offset by a 3% increase in ticket. Importantly, CEO Laxman Narasimhan said the U.S. business is seeing “green shoots” from the three-part action plan unveiled last quarter. The plan’s goals are to meet and unlock capacity for new demand, attract new customers and drive transaction growth from new products, and reach new customers by improving the Starbucks experience. One of the keys to management’s program was the Phase 1 rollout of the Siren Craft System , which is designed to enhance processes in stores. The company saw incremental improvements across key performance, throughput, efficiency and reliability metrics in the 1,200 stores that adopted the system, prompting management to fully deploy this system across its entire U.S. operated store portfolio this week. This is good news. We never understood why the company would be so slow rolling this out. We’re also pleased to see the company increase its active U.S. Starbucks Rewards memberships. After falling sequentially last quarter to 32.8 million, the company’s marketing programs led to active membership growing to 33.8 million during the quarter. In Starbucks’ international segment, comparable store sales fell 7%, missing estimates of a 5.1% decline. This should hardly be a surprise due to pressures in China, which posted a 14% decline in comparable store sales, worse than the negative 6.7% consensus estimate on FactSet and the 11% drop in the prior quarter. The Chinese market remains plagued by a cautious consumer and intense competition leading to price wars, but management said there was progress quarter over quarter in key areas like average daily transactions, weekly sales and operating margin. Starbucks’ commitment to China is unwavering, but Narasimhan did say on the call that it is in the early stages of exploring strategic partnerships that could benefit its competitive positioning. Management also cited weakness in the Middle East, Southeast Asia, and parts of Europe, which it said was driven by misperceptions about its brand. Lastly, Narasimhan confirmed the activist firm Elliott Management has taken a stake and are engaged in talks, which he described as “constructive.” Guidance Last quarter’s significant cut to the outlook gave management enough breathing room to operate within its new expectations. The headline figures are total global revenue growth in the low single digits and adjusted EPS growth that is flat to up in the low single digits. The current consensus forecast on FactSet calls for total sales increasing about 2% year over year and adjusted EPS up 1% year over year. (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. 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A Starbucks store stands in Manhattan on January 30, 2024 in New York City.
Spencer Platt | Getty Images
Starbucks served up better-than-feared quarterly results Tuesday night, sending shares of the coffee giant higher in extended trading. The company is by no means out of the woods yet, but the encouraging market reaction supports our recent decision to upgrade and buy the stock.
- Revenue fell 0.6% year over year to $9.11 billion in the fiscal 2024 third quarter, missing the $9.24 billion expected by analysts, according to LSEG.
- Adjusted earnings per share of 93 cents fell 6% year over year, matching estimates, LSEG data showed.
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