Starbucks in trouble: Sales slump as customers stay away

The coffee giant, Starbucks, is grappling with significant challenges. Preliminary fourth-quarter results reveal a renewed decline in sales, marking the worst performance since the pandemic.

Preliminary Q4 Results:

• Preliminary comparable store sales: -7% (estimates: -3.48%)

• Preliminary comparable store sales in the US: -6% (estimates: -2.81%)
• Preliminary comparable store sales in China: -14% (estimates: -10.5%)
• Preliminary adjusted earnings per share: 80 cents (estimates: $1.03)
• Preliminary net revenue: $9.1 billion (estimates: $9.36 billion)

Additional Information from the Preliminary Report:

• Quarterly dividend increased to $0.61 per share from $0.57.

• Report highlights weakness in North American revenue.
• Starbucks suspends publishing guidance for 2025.

Starbucks' preliminary results fell short of expectations. The final data for the fiscal fourth quarter of 2024 will be released on October 30. Source: Bloomberg Finance LP

Results up to the third fiscal quarter. Source: Bloomberg Finance LP, XTB

Commentary on the Preliminary Results:

Customers, particularly in the United States, are visiting Starbucks cafes less frequently, driven by high coffee prices. The price of a latte has recently neared the $6 mark. Global comparable store sales declined by 7%, and in the US alone by 6%. In China, Starbucks' largest overseas market, sales dropped by 14%, linked to the weakness of the Chinese consumer, who is starting to save for an uncertain future. In the US, consumers, due to rising living costs, are cutting back on spending and seeking cheaper alternatives. Meanwhile, in China, Starbucks is facing stronger competition, such as Luckin Coffee, and an economic slowdown that is impacting the sentiment of Chinese consumers. It is also worth noting the significant increase in coffee prices over the past year, both for Arabica and Robusta beans, which is reducing coffee shop margins.

Starbucks shares fell by over 4% following the announcement of the preliminary results. The price has declined by over 1% since the beginning of the year, including yesterday's after-hours trading.

Starbucks shares have been trading sideways since 2019, lagging far behind the S&P 500. Source: xStation5

Can the new CEO improve the company's condition?

It is worth noting that Starbucks has a new CEO. The new chief executive, Brian Niccol, faces a challenging task. He joined the company at a time when sales have been declining for two quarters. He has pledged to focus on improving the customer experience, especially during peak morning hours, and streamlining cafes. Furthermore, he also wants to simplify the overly complex menu and ensure that every visit to Starbucks is a positive experience for the customer. Niccol also plans to make changes to the mobile ordering system so that it does not negatively impact the atmosphere in cafes. Some critics argue that Starbucks has moved away from its roots and has ceased to be a meeting place and relaxation spot for coffee lovers.