Investors are cautious ahead of Starbucks’ (NASDAQ:SBUX) Tuesday earnings report, with expectations set for a challenging quarter. The coffee giant, known for its strong consumer base, is now facing different expectations compared to a year ago. This article provides a detailed preview of what to expect from Starbucks’ Q3 earnings, focusing on the company’s sales performance and strategic initiatives.
Anticipated Financial Results
For the third quarter, Starbucks is expected to report a slight revenue increase of 0.37% to $9.20 billion, according to Bloomberg consensus estimates. Adjusted earnings per share are forecasted to be $0.92, down from $1.00 a year ago. Same-store sales are projected to decline for the second consecutive quarter, with a 2.71% drop, while overall foot traffic is anticipated to decrease by 4.27%.
The average check size is estimated to rise by 1.98%, driven by menu price increases and new product launches, such as popping boba-like pearls and iced energy drinks. Additionally, Starbucks introduced a limited-time “pairing menu,” offering customers a small iced or hot coffee with a butter croissant or breakfast sandwich for $5 or $6. However, these initiatives may not be sufficient to offset the broader sales decline.
Analyst Perspectives
Deutsche Bank analyst Lauren Silberman notes, “We believe US same-store sales remained weak in Q3 despite a meaningful increase in promotional activity and several product launches in the quarter.” Silberman has a Hold rating on Starbucks stock, indicating a cautious outlook among analysts. She adds, “Sentiment on Starbucks continues to lean negative … [it] has been less topical than other large caps and relative to the past few quarters.”
Baird analyst David Tarantino attributes the weak performance to “cyclical macro issues,” expecting softness in sales for the majority of fiscal 2024 as consumers reduce discretionary spending, including afternoon visits to Starbucks. Tarantino also maintains a Hold rating on the shares.
Activist Investor Pressure
The upcoming earnings report comes amid increased pressure from activist investor Elliott Investment Management, which has taken an undisclosed stake in Starbucks. According to a report from the Wall Street Journal, investors are questioning Elliott’s experience and track record in the consumer sector. Bernstein analyst Danilo Gargiulo suggests that an external nudge from Elliott may prompt bold decisions, offering interesting risk-reward opportunities for long-term investors willing to accept a potentially prolonged turnaround.
China’s Market Challenges
Improving results in China, Starbucks’ second-largest market, remains a critical focus. Last quarter, China experienced the most significant decline among Starbucks’ segments, with same-store sales down 11%, foot traffic down 8%, and the average ticket size down 4%. Wall Street expects similar results this quarter, with sales projected to decline by 10.58%.
Starbucks CEO Laxman Narasimhan attributed the poor performance to a decrease in occasional customers, changing holiday patterns, a high promotional environment, and normalized customer behaviors following the previous year’s market reopening. Bank of America analyst Sara Senatore notes that Starbucks’ struggles in China reflect broader industry challenges, stating, “Intense competition is the natural state of restaurant markets and even the strongest brands are not insulated.”
McDonald’s (NYSE:MCD) also reported declining sales growth in China during its Q2 results, highlighting ongoing consumer sentiment challenges in a competitive environment. Gargiulo believes franchising could be a viable strategy for Starbucks in China, providing an “equally compelling alternative to leverage buildout of one of the biggest coffee markets without the capital allocation” and reducing exposure to fluctuating macroeconomic conditions.
Earnings Preview
Based on Bloomberg consensus data, here’s what Starbucks is expected to report compared to Q3 2023:
- Revenue: $9.20 billion compared to $9.17 billion
- Adjusted earnings per share: $0.92 compared to $1.00
- Same-store sales: -2.71% compared to +10%
- North America same-store sales: -2.30% compared to +7%
- US same-store sales: -2.37% compared to +7%
- International same-store sales: -5.11% compared to +24%
- China same-store sales: -10.58% compared to +46%
- Foot traffic: -4.27% compared to 5.00%
- Ticket Growth: 1.98% compared to 4%
Revised Outlook
Following Q2, Starbucks revised its 2024 outlook for the third time this fiscal year. The company now expects global revenue growth in the low single digits, down from the previous range of 7% to 10%. Global and US same-store sales are anticipated to see a low single-digit decline or remain flat, a downgrade from the previously expected 4% to 6% growth. In China, same-store sales are projected to decline in the single digits, reversing from the prior forecast of low-single-digit growth.
Starbucks faces a challenging landscape as it navigates weak sales and strategic shifts. Investors and analysts will closely watch the Q3 earnings report for insights into the company’s future performance and potential recovery strategies.
Featured Image: Freepik
