Starbucks’ plan for stock gains includes more than just discounts and value combos
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Starbucks ‘ new breakfast deals may hit the sweet spot for customers. But the coffee giant needs to serve up bigger changes to its operations to get back into Wall Street’s good graces. Offering food and beverage combos may boost Starbucks’ traffic in the short-term, analysts said, but it’s probably not a sustainable path over time given the company’s reputation as a premium coffee brand. The more substantial issues that are hurting sales, such as customer wait times, need to be resolved before declaring the company out of the woods after reporting a terrible quarter two months ago. “It’s execution. He needs to execute better,” Jim Cramer stressed, referring to Starbucks CEO Laxman Narasimhan, during the Investing Club’s June Monthly Meeting . “I think he can do that,” Jim said, adding that he’s waiting on the company’s next earnings report before making a move on the stock. The company is expected to deliver its latest quarterly results later this month. Starbucks ran several promotions during May, such as 50% off one afternoon drink every Friday and personalized offers for rewards program members. Then in mid-June, Starbucks launched its limited-time “Pairings Menu,” which includes a $5 coffee-and-croissant combo and a $6 coffee-and-breakfast-sandwich deal. This past Monday, Starbucks’ app became available to non-rewards members, an initiative executives expect to drive $1 billion in sales over the next three years. The efforts are part of Starbucks’ push to win back occasional customers while maintaining demand from its loyalty members after the company saw a steep drop in traffic last quarter. That led to a huge earnings miss and cut to full-year guidance on April 30 after the close. It shook the faith of many investors, including us, with Jim criticizing management for seemingly failing to recognize the depths of the problems facing its business. The stock plunged nearly 16% the day after the report — its fourth-worst session ever. Starbucks shares were only about $1 above their post-earnings close of $74.44 and remain down more than 14.5% from where they finished before the release. Starbucks has pinned its fiscal second-quarter woes on a variety of factors, including poor weather in North America, continued misconceptions about its position on the Israel-Gaza conflict, and economic sluggishness and competition in China. A more cautious consumer has weighed on business, too. SBUX YTD mountain Starbucks’ year-to-date stock performance. At an investor conference in early June, Starbucks CFO Rachel Ruggeri said the company’s marketing efforts and targeted offers were bearing fruit and contributing to sequential revenue growth. Those comments came before the Pairings Menu hit stores. Starbucks is far from the only food-and-beverage chain to introduce value meals in recent months to appeal to inflation-wary customers who are feeling their budgets squeezed by years of price pressures. Fast-food giants McDonald’s , Burger King, and Taco Bell have all done so. Wendy’s sweetened its existing $5 meal deal. “Our customers come to Starbucks for our premium, personalized products and their connection with our baristas. As some customers face a challenging economic environment, we’re working to ensure they continue to enjoy the Starbucks experience they love,” a Starbucks spokesperson said. ‘Enduring success’ Wall Street analysts said Starbucks’ embrace of promotions needs to be accompanied by larger changes to operations to get the company back on track. Combo meals and drink discounts are more of a shorter-term solution rather than a fundamental shift that would improve traffic significantly, said Jefferies analyst Andy Barish. In Starbucks’ fiscal second quarter, which ended March 31, transactions were down 7% in North America — a clear sign that fewer people were stopping at its cafes. Same-store sales were down 3%. “We wouldn’t expect much of a change from fiscal second quarter. Trends will probably be similar to that in the near term,” Barish explained in an interview with CNBC. The analyst has a hold-equivalent rating on Starbucks shares on the belief that turning around its U.S. operations will take time. In a recent research note, TD Cowen said it was skeptical Starbucks’ new $5 and $6 all-day Pairings Menu will “lead to enduring success” for a company that has long presented itself as a premium brand. The offering is “launched from a position of weakness and risks weighing on gross margins,” TD Cowen analysts explained. “Rather, we prefer to see Starbucks place more of an emphasis on operations to improve near-term throughput,” an industry term for the number of customers served in a given period. Edward Lewis, analyst at Redburn Atlantic, echoed TD Cowen’s call for more wholesale improvements. “Thinking value is the answer could be dangerous when there are other factors that have weighed on comps,” Lewis said in an interview with CNBC. “By all means, have some promotions, but devise better innovations, [and] speed up the process of the stores,” Lewis added who has a neutral rating on shares. Order up Jefferies’ Barish also raised questions about Starbucks’ menu innovations, arguing its updated drink options are not driving sales as much as hoped. Offerings such as the limited-time Spicy Lemonade Refreshers , bubble teas, and fruity energy drinks that launched in late June all “have one thing in common: They’re not coffee related, and they’re not really striking a chord with the core Starbucks consumer,” Barish said. On its April 30 earnings call, Narasimhan said that “not all” of Starbucks’ new products have met its expectations, but he was upbeat on its line of lavender-flavored drinks, including an iced tea. “It compares to some of the most successful launches we’ve ever had. But to cut through, we’re working to drive even more buzzworthy products and on strengthening the supply of products that become popular,” he said. Ruggeri said at the June conference that its Summer-Berry Refresher resonated well with customers. She said while coffee continues to be “core to who we are,” some of its new drinks are meant to help spur demand in the afternoon. Barish suggested that some of the new menu items may exacerbate a big operational challenge for Starbucks: getting customers their drinks promptly. “One of the unintended consequences of all these menu innovations that aren’t necessarily driving the top line is that they’re adding more complexity to the baristas’ job” and possibly decreasing productivity, he said. Long wait times — along with product availability — contributed to a double-digit incompletion rate on mobile orders during the second quarter. To be sure, management has acknowledged issues with throughput and detailed plans to improve it. Starbucks also is mindful of how new menu items add to the complexity of baristas’ roles, Ruggeri said at the June conference. Starbucks is rolling out a process called the ” Siren Craft System ” designed to streamline the drink-making process and reduce wait times. It will be in place across North America by the end of this month, CNBC reported . The company also is trying to provide more accurate estimates of when orders will be ready. Bottom line Offering value for customers is a step in the right direction, but the company needs to make progress on issues like wait times and desirable menu items in order to right the ship in a sustainable way. We’ve been willing to stick with the stock because of the strength of the Starbucks brand and a belief that Narasimhan can improve execution. At the same time, it may take time to see improvement beyond one quarter. The company’s next quarterly report — due out in a few weeks — will help refine our outlook. We currently have a 2 rating on Starbucks shares — meaning we would wait for a pullback before buying and a $90 price target on the stock. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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A Starbucks store stands in Manhattan on January 30, 2024 in New York City.
Spencer Platt | Getty Images
Starbucks‘ new breakfast deals may hit the sweet spot for customers. But the coffee giant needs to serve up bigger changes to its operations to get back into Wall Street’s good graces.
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