Starbucks Continues to Face Challenges, Yet Could Present a Unique Chance for Redemption in this Decade
Although Starbucks Corporation (SBUX -0.80%) has been a solid investment choice throughout its history as a public company, it hasn't delivered the same success for shareholders in recent times.
As we speak, this top caffeine stock is trading 22% below its all-time high price. In the past three years, it has provided a cumulative return that would have cost investors 5% of their initial investment. This poor performance contrasts with the 32% total return of the S&P 500.
Starbucks' financial health seems to be in jeopardy, as the stock's performance suggests. But is the current situation an investment opportunity that might provide returns over the next decade?
Uninspiring trends
It's an understatement to say that Starbucks has been struggling of late. The economy and consumers have, for the most part, remained resilient over the past year, despite the persistent feeling of anxiety. However, Starbucks' financials have not mirrored this trend.
In the last fiscal quarter (Q4 2024, ending September 29), the company reported a 7% drop in global same-store sales, with noticeable declines in its two primary markets, the U.S. and China. This marks the third consecutive quarter of year-over-year same-store sales decreases, which is far from encouraging.
The number of transactions has been on a downward trajectory, indicating a lack of customers visiting Starbucks stores. The high prices and long wait times experienced by customers are believed to be a factor in the declining popularity of Starbucks.
To make matters worse, the retail coffee industry is highly competitive and fragmented. The five largest chains in the U.S. account for less than half the market share. Consumers have numerous alternatives when they choose not to spend their money at large chains. With customers incurring no switching costs, Starbucks has limited wiggle room before it begins to lose ground, which seems to be happening now.
New leadership
Between April 2023 and August 2024, Laxman Narasimhan served as Starbucks' CEO, despite being chosen by long-time predecessor Howard Schultz. During his tenure, the company continued to experience weak sales and financial performance.
Recognizing the need for change, the company tapped Brian Niccol, who previously held the top position at Chipotle Mexican Grill, in September to revitalize Starbucks and turn its fortunes around. Upon the announcement of the new CEO in August, the stock soared by more than 20%, reflecting the market's confidence that Niccol is the right man for the job.
Niccol deserves credit for his role in Chipotle's growth, which benefited shareholders significantly in recent years. As Chipotle's CEO, the Tex-Mex chain experienced a surge in revenue and earnings under Niccol's leadership.
His current priorities include leveraging Starbucks' well-known brand to re-attract customers, particularly in the U.S. His plan is to expedite order fulfillment, provide better tools for employees, and promote the brand.
Starbucks' valuation
At the time of writing, the stock has a price-to-sales (P/S) ratio of 3.1. The current valuation is a 17% discount compared to the average of the previous five years. This undervaluation is warranted, considering the company's ongoing challenges in boosting store-level sales growth.
The silver lining is that Starbucks boasts one of the world's most powerful consumer brands and has proven its resilience over several decades.
However, only those investors who believe in Brian Niccol's ability to lead a successful turnaround should consider purchasing the stock. A successful turnaround under Niccol's leadership could result in substantial returns for shareholders, making Starbucks an exciting investment opportunity for the next decade.
More risk-averse investors might want to wait until Starbucks returns to positive same-store sales growth before considering investing in the stock.
Despite Starbucks' current financial struggles, some investors may view the company as an opportunity due to its undervalued price-to-sales ratio and its renowned brand. Investing in Starbucks could potentially yield substantial returns if Brian Niccol, the new CEO, successfully turns around the company's performance.
However, as the retail coffee industry is highly competitive and customers have numerous alternatives, it's crucial to evaluate the risks associated with such an investment. Patient investors might prefer to wait until Starbucks shows consistent positive same-store sales growth before committing their funds.
