Can Starbucks’ Stock Rise 55% To Its Pre-Inflation Shock Highs?

[Note: Starbucks’ fiscal year 2023 ended October 1]

Starbucks stock (NASDAQ: SBUX), the world’s leading roaster, marketer, and retailer of specialty coffee worldwide, currently trades at $81 per share, around 36% below its level of $126 seen on July 26, 2021 (pre-inflation shock high), and has the potential for gains. Starbucks reported fiscal Q2 2024 adjusted EPS of $0.68, well below the consensus of $0.80 (down 7% year-over-year (y-o-y)), primarily due to weak net revenue of just $8.6 billion (down 2% y-o-y and 6.5% below consensus) and a 240 basis point decline in operating margin. In fact, the coffee king’s Q2 operating margin was just 12.8%, well below the ten-year average of 15.1%. In addition, comparable sales for the entire company were down 4.0%, driven by a 6% decline in total transactions, partially offset by a 2% increase in average spending per customer. Rising operating costs of its stores, increased promotional activities, and higher wages were mainly responsible for the rather weak outcome. China saw the worst decline in comparable sales (-11%) in Q2. Since 18% of all SBUX stores are in China, this geography remains a challenge to the company.

Due to the disappointing Q2 results, Starbucks slashed its full-year outlook. The company is now calling for fiscal 2024 revenue growth in the low single-digits, down from its previous range of 7% to 10% y-o-y growth. It should be mentioned that inflationary pressures played a big role in the company’s weak Q2 results. Starbucks stock is down almost 15% year-to-date. In comparison, SBUX’s peer McDonald’s stock (NYSE: MCD) is down 12% since the beginning of this year. In light of this year’s decline, shares are currently trading at a compelling price-to-earnings ratio of only ~22 (compared to a high 20s historical figure). We believe the coffee company’s stock could see gains in the long term based on the fact that it is still growing in the United States and has substantial growth potential in China and beyond. All told, Starbucks has consistently raised its dividend since it started paying one in the year 2010 and it will likely continue to rise going forward.

SBUX stock has faced a notable decline of 25% from levels of $105 in early January 2021 to around $81 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the decrease in SBUX stock has been far from consistent. Returns for the stock were 9% in 2021, -15% in 2022, and -3% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that SBUX underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SBUX face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that SBUX will have to gain about 55% from here. While it has the potential to recover to those levels eventually, we estimate SBUX’s Valuation to be around $80 per share, almost in line with the current market price. Our detailed analysis of SBUX’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to a high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024.

In contrast, here’s how SBUX stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

SBUX and S&P 500 Performance During 2007-08 Crisis

SBUX stock fell from nearly $13 in October 2007 (pre-crisis peak) to almost $5 in March 2009 (when the markets bottomed out), implying that SBUX stock lost almost 65% of its pre-crisis value. It grew from the 2008 crisis to levels of around $12 in early 2010, rising roughly 152% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of $1,540 in September 2007 to $757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of $1,124.

SBUX Fundamentals Over Recent Years

SBUX revenues grew from $29.1 billion in 2019 to $36 billion in FY 2023, striking a healthy balance between rising customer traffic and increased spending during this period. Earnings per share grew slightly to around $3.60 in FY 2023 from $3.56 in FY 2019.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe SBUX stock has the potential for strong gains once fears of a potential recession are allayed.

It is helpful to see how its peers stack up. SBUX Peers shows how SBUX stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/6/2024
[2] Cumulative total returns since the end of 2016