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Bear of the Day: Starbucks (SBUX)

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Starbucks Company Overview

Zacks Rank #5 (Strong Sell) stock Starbucks ((SBUX - Free Report) ) is the top roaster and retailer of specialty coffee worldwide. In addition to its fresh, rich-brewed coffees, Starbucks also sells premium teas, breakfast sandwiches, juices, and other snacks through its more than 38,000 cafes globally. Beyond its heavy retail presence, the company also generates revenues through licensed stores, consumer packaged goods, single-serve coffee products, and read-to-drink items sold in grocery stores and warehouse clubs like Costco (COST).

Starbuck’s Sales Slow Despite Strong Economy

Reduced consumer traffic during fiscal 2024 has negatively impacted comparable store sales. The company’s North America segment declined 2%, international declined 2%, and China plummeted 8%, year-over-year. Starbucks faces three major, difficult-to-reverse hurdles in the future, which include:

·       Waning Consumer Interest: SBUX was once the hot and hip “go-to” place for people to grab a coffee. However, as time has passed, the company has lost the benefit of being new and hip.

·       Health Concerns: More Americans are waking up to the obesity epidemic and the causes behind it. Unfortunately for Starbucks, many of the company’s highest-margin drinks are packed with sugar. As citizens become more health conscious, SBUX sales should be negatively impacted.

·       Increased Competition: Starbucks has already largely saturated most major global markets. In addition, increased competition may eat into existing locations.

Negative Earnings Growth

The company anticipates stubborn headwinds to persist with challenging consumer environments in the Middle East, South East Asia, and parts of Europe. To make matters worse, the company’s adjusted margins declined due to increased marketing expenses, macro challenges, and an increase in benefit-related spending.

 Zacks Consensus Earnings Estimates suggest that SBUX EPS will see negative growth for the current quarter, next quarter, and full-year 2025 periods.

Zacks Investment Research
Image Source: Zacks Investment Research

Relative Price Weakness

The SBUX share price mimics the fundamentals and should be a red flag for investors interested in outperforming the market. SBUX shares have dramatically underperformed the market over the past five years, gaining a minuscule 1.6% versus the S&P 500’s 90% gains over the same timeframe.

Zacks Investment Research
Image Source: Zacks Investment Research

Bottom Line

Despite its global dominance, Starbucks faces significant headwinds. Declining consumer interest, health concerns surrounding sugary drinks, and increased competition adversely impact earnings growth.


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