When it rains, it pours. And it rained pretty heavily on
Starbucks
in the last leg of the year—something Wall Street is expecting will show up in the company’s fiscal first-quarter earnings report.
The Street expects Starbucks to post earnings of 93 cents a share from $9.6 billion in revenue, according to FactSet consensus estimates. Same-store sales are projected to rise by 7.1%.
Results for October through December are due on Tuesday afternoon.
Earnings haven’t fallen short of expectations in the past three fiscal quarters, but many analysts are bracing themselves for disappointment this time around. In the past month, the consensus forecasts for earnings and sales have declined by 2.6% and 1.1%, respectively, according to FactSet.
Third-party data suggest that sales grew at a slower pace than in the same quarter last year, given that the number of visitors to the stores fell 2.1% from a year earlier, wrote
Citi
analyst Jon Tower in a mid-January note previewing Starbucks’ earnings. He has a Neutral rating on the stock and a target of $102 for the price.
“As long as high-frequency data remains soft, it becomes difficult to disprove several bear arguments,” Tower wrote.
The past couple of months have given skeptics on the stock plenty of reason for confidence. From early October to Jan. 1, Starbucks stock has gained 5.4%, underperforming the S&P 500’s 11% gain during the same period. At one point during the quarter, the stock went through a 12-day losing streak that wiped out more than $10 billion in market capitalization.
In October, the company came under heat for its response to the Israel-Hamas war, prompting boycott calls from both sides of the conflict. A month later, some of the company’s unionized stores went on strike. And in December, a third-party report—commissioned by Starbucks in response to shareholder pressure—found that while the company didn’t purposely engage in an antiunion campaign, it had bungled its response to the rise in union activity, resulting in “significant” negative consequences.
Controversy aside, bears also point to the fact that growth in China, Starbucks’ second-largest market, may be stalling. Andrew Charles, an analyst at TD Cowen, says that he wouldn’t be surprised to see the company reduce its forecast for same-store sales growth in China.
“The China turnaround is more complex, and we anticipate it will take more than 12 months,” he wrote last week. Charles rates the stock Market Perform with a $102 price target, while the shares closed Monday at $93.80.
A majority of analysts have their doubts about the stock: 62% rate the stock at Hold or the equivalent, while 38% have it at Buy.
On their end, the bulls say the pessimism presents an opportunity.
Wells Fargo’s
Zachary Fadem believes the stock’s lower valuation has improved the balance between risks and potential rewards.
“A SBUX miss seems priced in & we like the ‘24 setup from here,” he wrote in a note last week. Starbucks is one of his top picks for the coming earnings season. He rates it Overweight with a $105 target.
William Blair’s Sharon Zackfia agrees. “The noise of union walkouts and war-related boycotts makes it difficult to assess the true underlying health of the U.S. business in recent months,” she wrote in an earnings preview from mid-January. And that business, she says, is still in fairly good health.
Zackfia believes the company will reaffirm its guidance for fiscal 2024, which would put it on track for the kind of solid growth management forecast for the long term. Plus, recent initiatives to streamline store operations and improve work conditions for baristas could “materially improve” sales and productivity in the U.S. in the coming years, she added.
Zackfia has an Outperform rating on the stock, but no target for the price.
Write to Sabrina Escobar at [email protected]
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