Starbucks Earnings: Not a Lot to Like About Results as Global Traffic Sputters

Key Morningstar Metrics for Starbucks

• Fair Value Estimate: $105.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Starbucks’ Earnings

Starbucks’ SBUX fiscal second-quarter earnings were very weak, sending shares spiraling (down 12%) in after-hours trading. Given the difficult trends, we expect pressure on sales to continue through fiscal 2025. To be clear, we do not think we’ve hit peak Starbucks, and we believe the firm’s long-term prospects remain extremely salient. However, the degree of comparable store sales pressure the firm saw in its most recent quarter was shocking. Global comparable sales fell 4%, with traffic falling 7%. That represents a staggering 9-point comparable sales and 10-point comparable traffic decline over three months.

As we digest earnings and sharpen our pencils for our 2024 and 2025 forecasts, we expect to lower our $105 fair value estimate by a high-single-digit percentage, with our outlook remaining slightly more constructive than the market reaction. Shares continue to look cheap, and long-term investors should find the current entry point attractive, though we suggest that investors fasten their seatbelts for the next 18 months.

During the quarter, sales of $8.56 billion and diluted earnings per share of $0.67 fell materially shy of our $9.43 billion and $0.88 estimates. The shortfall was predominately driven by the underwhelming comparable store sales, which missed our 3.5% growth estimate for North America by 9.5% and our 1.6% estimate for international markets by 7.6%.

As we see it, the biggest near-term issue is that management has largely run out of levers to reverse traffic losses. Its Triple Shot Reinvention plan remains cogent, but throughput-enhancing investments tend to matter less when traffic remains anemic. Elsewhere, menu innovation may help, but it’s unclear whether texture innovation (such as boba) or energy beverages will prove sufficient to defy the gravity of persistent, industrywide traffic declines.