Starbucks Expected to Report Weak Sales as It Pushes Popping Pearls and Value Plays

Starbucks (SBUX) investors are cautious ahead of its Q3 earnings report, with shares down nearly 28% compared to a year ago. The company’s Q3 revenue is expected to grow 0.37% to $9.20 billion, with adjusted earnings per share expected to be $0.92, compared to $1.00 a year ago. Same-store sales are expected to decline for the second quarter in a row, down 2.71%, while overall foot traffic is expected to drop 4.27%. The size of the average check is estimated to be up 1.98% as menu prices increase, possibly boosted by new items launched during the quarter like popping boba-like pearls and iced energy drinks.

Deepbank analyst Lauren Silberman believes US same-store sales remained weak in Q3, despite a meaningful increase in promotional activity and several product launches in the quarter. Deutsche Bank analyst Lauren Silberman has a Hold rating on the stock, adding that sentiment on Starbucks continues to lean negative. Baird analyst David Tarantino expects softness in the majority of fiscal 2024 sales as consumers pull back on discretionary spending, including afternoon occasion at Starbucks.

This earnings report comes as pressure is mounting from activist investor Elliott Investment Management, which took an undisclosed stake in the company, according to a report from WSJ. Bernstein analyst Danilo Gargiulo believes the Elliot team would prioritize improving results in its second-largest market, China, as well. Last quarter, China saw the biggest drop of all Starbucks segments, with same-store sales down 11%, foot traffic down 8%, and the average ticket size down 4%. Wall Street expects roughly the same, with sales down 10.58% this quarter.

Bank of America analyst Sara Senatore said Starbucks’ performance in China is tied to industrywide struggles, with intense competition being the natural state of restaurant markets and even the strongest brands not insulated. McDonald’s pointed to declining sales growth in China in its Q2 results as consumer sentiment remains weak in a competitive environment. Gargiulo believes franchising may be the way to go in the market with an “equally compelling alternative to leverage buildout of one of the biggest coffee market without the capital allocation” and less exposure to “fluctuating macro-economic conditions.”

Starbucks still aims to have 9,000 locations in China by 2025. Following Q2, Starbucks revised its 2024 outlook for the third time this fiscal year, expecting 2024 global revenue growth of low-single digits, down from the previous range of 7% to 10%, which itself was down from a prior guidance of 10% to 12%.

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