Shares of Starbucks (SBUX -2.43%) plunged nearly 16% following a lackluster fiscal second-quarter earnings report. The stock is now down about 35% over the past year.
Let’s look at why Starbucks stock fell, what its turnaround plans are, and whether now is a good time to buy the stock.
Troubles in China and the U.S.
With the U.S. and China representing over 60% of Starbucks global locations, these two markets are the most important for the coffeehouse operator. Unfortunately for the company, both markets saw considerable weakness during the quarter.
In the U.S., Starbucks saw its same-store sales decline 3% compared to a 12% increase a year ago. Traffic to its stores fell 7%, while the average ticket price rose 4%.
The company blamed a weakening economic outlook and severe weather in parts of the country for its weak U.S. results. Starbucks said that its occasional customers, in particular, were coming in less often. Increased prices together with a shift toward higher-priced cold drinks helped lift its average ticket.
In China, meanwhile, comparable-store sales sank 11% compared to a 3% increase a year ago. Traffic to its stores fell 4%, while the average ticket dropped 8%. Starbucks became more promotional in China in the fourth quarter, when its average ticket was down 9%. However, that helped lead to a 21% increase in traffic. More promotions and lower prices did not have the same impact in the first quarter of 2024.
Starbucks said that as in the U.S., occasional customers in China were visiting its coffee shops less often. It said this was a result of macroeconomic weakness, competition, and a return to more normal behavior after last year’s market reopening.
Turnaround plan
Given its poor results, Starbucks does not plan to sit by idly; it laid out efforts to help turn around its operations.
In the U.S., it will look to improve throughput by lowering wait times and having better product availability. Management said currently the company has difficulties meeting peak morning demand, and that app customers often put items in their carts but don’t complete their purchases due to long wait times.
As a result, Starbucks is rolling out its equipment-driven Siren System and fine-tuning how it’s used to help speed up orders. The company is also investing in its Deep Brew artificial intelligence (AI) technology to both improve wait times and create more transparency into wait times, as well as making supply chain investments.
Starbucks will also launch more innovative menu offerings, both beverages and food items, with an emphasis on coffee beverages. In addition, the company is testing extended overnight hours, with delivery between 5 p.m. and 5 a.m. It’s also looking at better ways to connect with occasional customers through its app, so these customers can see special offers.
In China, meanwhile, the company said it’s continuing to play the long game. Its strategy remains making technology investments to digitize its stores, and continuing to innovate by offering locally relevant menu items. It will also keep opening more locations in China, especially in lower-tier markets and county-level cities, where it has been seeing better new-store economics.
Image source: Getty Images.
Is it time to buy the dip?
Starbucks’ problems in the U.S. are likely temporary, although they won’t be fixed overnight. After years of increased prices from a high inflationary environment, consumers are starting to cut back. While Starbucks has a solid plan in place to help reinvigorate growth in the U.S., if consumer buying power continues to weaken, these initiatives likely won’t help in the near term. However, they could set the company up well longer-term.
China is the bigger worry, as the competitive landscape is fierce. Luckin Coffee (OTC: LKNC.Y) and other competitors continue to rapidly expand their number of locations in the country, while offering lower prices. Luckin opened a whopping 2,342 new stores in the first quarter. Even Yum China Holdings (NYSE: YUMC), the owner of KFC in China, has gotten in on the coffee game with its KCoffee brand, as well as having a joint venture with Italian coffee roaster Lavazza for Lavazza-branded coffee shops.
China is not only Starbucks’ second-largest market, but also its biggest market for opening new locations. Right now, it appears China is getting inundated with coffee shops.
Trading at a forward price-to-earnings (P/E) ratio of about 20, Starbucks is at one of its lowest valuations in quite some time. This isn’t the first time the company has faced pressure, and founder Howard Schultz famously returned as CEO of the company back in 2008 to right the ship and turn Starbucks around. Schultz just retired from Starbucks’ board last year.
SBUX PE Ratio (Forward) data by YCharts.
Over the long term, Starbucks should be a solid investment. However, given its issues, I see this consumer discretionary stock continuing to struggle in the near term. I’d consider waiting for signs of improvement in China before buying this dip.
