Starbucks: Is The Coffee Chain's Stock A Buy After This Year’s 30% Plunge?

 | Apr 14, 2022 08:11

  • Global coffee chain faces growing challenges at home and abroad, risking near-term growth
  • Management change, inflationary pressures, uncertainties about a new direction prompted some analysts to downgrade SBUX stock.
  • These headwinds are likely to persist in the short term, keeping SBUX under pressure
  • There seems to be no end in sight for Starbucks' (NASDAQ:SBUX) current market rout. The global coffee chain has been among the worst-performing multinational restaurant operators this year on Wall Street, underscoring its many short- and long-term challenges.

    Shares of the Seattle-based giant closed Wednesday at $80.92, continuing a sharp reversal from the stock's summer peak when it hit a record high of $126.32. Year-to-date, the company has lost 30% of its market value.

    SBUX Weekly Chart

    The latest round of selling came after the company’s founder Howard Schultz suspended a share-buyback plan early this month, arguing that he needed the cash to spend on stores and employees.

    Schultz—who announced his return to the coffee-market giant last month—faces a growing unionization effort at stores across the US and a resurgent COVID-19 virus in China, the company’s second-largest market.

    These challenges add to the already-hostile macro environment. With the highest inflation rate in four decades at home along with the war in Ukraine, food and coffee prices are escalating, cutting back Starbucks’ profit margins.

    Furthermore, in February, the chain saw a surge in costs for isolation pay and worker training, along with supply-chain hiccups related to the pandemic.

    These headwinds appeared in the company’s latest earnings report when Starbucks significantly missed analysts’ estimates.

    Too Much Uncertainty

    The company now sees earnings per share falling 4% to 6% in its current fiscal year, versus a prior view that it would decline 4% or less. Estimates compiled by Bloomberg project operating margin will narrow to 16.3% this fiscal year, down from 16.8% last year.

    Get The App
    Join the millions of people who stay on top of global financial markets with Investing.com.
    Download Now

    In China, government restrictions and virus resurgences are also hurting growth. In the company’s fiscal first quarter, comparable sales in that region declined 14%, compared to an expected 9.3% drop.

    The management change, inflationary pressures, and uncertainties about the company’s new direction are some of the factors prompting some analysts to downgrade SBUX stock in recent days.

    In an poll of 35 analysts, 17 don’t recommend buying the stock.

    Source: Investing.com

    In a note yesterday, Citi downgraded SBUX to neutral, saying there is too much uncertainty around the company to make a big bet on the stock. The note adds:

    “In addition to broader inflation pressures/risks, management changes/unionization pushes could be tied to additional partner investments and new ESG initiatives on the horizon present additional unknowns for forwarding estimates. Omicron and China lockdowns are likely to limit NT positive surprises, and it feels appropriate for shares to be trading near lows relative to the S&P 500.”

    Wedbush also downgraded shares of Starbucks in a recent note, citing a lack of new developments that could push the stock higher. Its note said:

    “While we believe the risks are incorporated in valuation, we also now see little in the way of catalysts for the foreseeable future until Howard Shultz finishes charting what appears to be a more meaningfully new direction for SBUX than we previously anticipated and communicates the new course to shareholders.”

    Bottom Line

    Starbucks continues to face uncertainty as costs escalate and its margins come under pressure. These pressures are likely to persist this fiscal year, depriving the stock of any meaningful upside in the near term.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes