Starbucks' (SBUX) green siren appears lost at sea.
The coffee giant had its worst trading day since March 2020, with shares down nearly 16% on Wednesday after reporting tough-to-swallow second-quarter results. The company missed all metrics (revenue, profit, and same-store sales) while seeing traffic declines around the world.
Now it's trying to win back customers with a variety of tactics like value offerings, menu innovation and faster service, but Wall Street professionals tell Yahoo Finance they're skeptical the efforts will be enough to course-correct.
“I actually think they're going in the wrong direction… the company should simplify and focus on the core,” Jefferies analyst Andy Barish told Yahoo Finance by phone. “They're going in way too many directions at once, while things are going downhill.”
Citi analyst Jon Tower struck a similar tone in a client note. Starbucks “puts many oars in the water to try to paddle back to shore,” he wrote. “We are concerned… this ignores the real leak in the bottom of the boat.”
Its CFO, Rachel Ruggeri, told Yahoo Finance that the revenue decline was due to “occasional customers” pulling back on spending, to which the company did not “react quickly enough.”
She added that the conflict in the Middle East and the higher promotional environment in China also weighed on quarterly results.
When Yahoo Finance asked if Starbucks plans to cut prices, Ruggeri said, “We're not.”
Shares of Starbucks are down 35% over the past year, compared to the S&P 500's (^GSPC) 22% gain.
Still, the company's current plans are unlikely to materially boost sales given tightening wallets.
“Traffic trends from this [occasional customer] cohort has been weak since mid-November,” Stifel analyst Chris O'Cull wrote in a note to clients.
Global pedestrian traffic fell 6% in the quarter, including a 7% decline in the US, which BTIG analyst Peter Saleh called “the worst in three years”. [for the US]similar to trends in 2008-2009, when value-seeking customers reduced frequency.”
In North America, average ticket size increased 4% this quarter. Ruggeri said most of that came from annual price increases. In previous quarters, ticket sizes increased as attendees added food or customized drinks.
Ruggeri argued that value is “not just about a price,” but about “experience.” The company plans to offer more discounts on the app and open it up to non-rewards members in hopes of attracting more loyalty members.
In the second quarter, the number of 90-day active Starbucks loyalty members fell to 32.8 million, compared to 34.3 million the previous quarter.
Barish said he is “somewhat skeptical of the near-term solutions,” while Tower wrote that “there is broad consumer resistance” to Starbucks' value equation.
The company is also introducing a plethora of menu innovations – think boba tea-style pearls, low-calorie energy drinks, more sugar-free syrups and an egg, pesto and mozzarella sandwich.
However, Starbucks' latest new products have left consumers wanting. “We believe the recent menu innovation (Lavender, Oleato) has simply not been well received, even though management is calling it a success,” Barish wrote in a customer note.
CEO Laxman Narasimhan cited speed of service as an area for improvement in the earnings call, citing that many shoppers are not following through with their app orders due to long wait times or a lack of product availability. A changing menu could put additional pressure on employees and store operations, O'Cull noted.
Others believe that Starbucks' star has simply fallen.
William Blair's Sharon Zackfia downgraded the stock to Market Perform, saying the “significant turnaround” in performance raises the question of “whether bigger – and more serious – issues are ahead, such as whether the company has overpriced or that the appeal of the brand has lost some. of his splendor.”
Some on the street have lowered their price target, but maintained a buy rating.
“Starbucks falls into category one: an established, global brand with good economics, no direct competitor and a highly sought-after customer base. These types of problems have proven to be solvable over time and good buying opportunities,” Saleh wrote in a customer interview. note after lowering his price target to $100.
Bank of America analyst Sara Senatore also reiterated her buy rating as she expects earnings growth to accelerate again in fiscal 2025 once Starbucks' latest initiatives “take hold.”
In total, there are currently 13 Buys, 23 Holds, and 1 Sell ratings on the Street.
The company revised its 2024 outlook for the third time this fiscal in its earnings call.
As of the second quarter, Starbucks expects global sales growth in the low single digits for 2024, down from the previous range of 7% to 10%, which in turn was down from the previous guidance of 10% to 12 %.
Global and U.S. same-store sales are expected to decline by low single digits or remain flat, compared to the previous growth range of 4% to 6%. Chinese retail sales are expected to decline by single digits, down from previously expected low single digit growth.
Starbucks originally expected mid-single-digit store growth in its markets.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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