Starbucks’ (SBUX) green siren appears to be lost at sea.
The coffee giant had its worst trading day since March 2020 as shares plunged nearly 16% on Wednesday after second-quarter results were hard to digest. The company missed all metrics (sales, profit and same-store sales) and experienced a decline in customer traffic worldwide.
Now the company is aiming to win back customers with various tactics such as value-added offerings, menu innovations and faster service, but Wall Street professionals tell Yahoo Finance they are skeptical that the efforts will be enough to correct course.
“I actually think they’re going down the wrong path…the business should be simplified and focused on what’s important,” Jefferies analyst Andy Barish told Yahoo Finance by phone. “You go in way too many directions at once when business gets worse.”
Citi analyst Jon Tower struck a similar tone in a note to clients. Starbucks “puts lots of oars in the water to try to paddle back to shore,” he wrote. “We’re concerned … this ignores the real leak in the bottom of the boat.”
Chief Financial Officer Rachel Ruggeri told Yahoo Finance the drop in sales was due to “casual customers” pulling back on spending, to which the company didn’t respond “quickly enough.”
She added that the conflict in the Middle East and the stronger advertising environment in China also weighed on quarterly performance.
When Yahoo Finance asked if Starbucks plans to cut prices, Ruggeri replied, “We’re not.”
Starbucks stock has plunged 35% over the past year, while the S&P 500 (^GSPC) has gained 22%.
Still, the company’s current plans are unlikely to significantly boost business given tightening budgets.
“Traffic trends below [occasional customer] “The cohort has been weak since mid-November,” Stifel analyst Chris O’Cull wrote in a note to clients.
Global foot traffic fell 6% in the quarter, including a 7% decline in the U.S. that BTIG analyst Peter Saleh called “the worst in three years.” [for the US]on par with the trends of 2008-2009, when value-oriented customers reduced their frequency.”
In North America, average ticket size increased 4% in the quarter. Ruggeri said most of that was due to annual price increases. In previous quarters, ticket sizes increased as visitors added food or customized drinks.
Ruggeri argued that value “depends not just on price” but on “experience.” The company plans to offer more discounts on the app and open it to non-rewards members in hopes of attracting more loyalty members.
In the second quarter, the number of 90-day members with an active loyalty program at Starbucks fell to 32.8 million, compared to 34.3 million last quarter.
Barish said he was “somewhat skeptical of the short-term solutions,” while Tower wrote “there is broad consumer resistance” to Starbucks’ value equation.
The company is also rolling out a host of menu innovations — think boba tea-like pearls, zero- to low-calorie energy drinks, more sugar-free syrups, and an egg, pesto and mozzarella sandwich.
However, Starbucks’ latest products have sparked desire among consumers. “We believe that the recent menu innovations (lavender, oleato) have simply not been well received, even though management claims they have been successful,” Barish wrote in a note to customers.
CEO Laxman Narasimhan cited service speed as an area for improvement in the earnings call, citing that many shoppers do not complete their app orders due to long wait times or lack of product availability. A changing menu could put additional strain on employees and store operations, O’Cull noted.
Others believe that Starbucks’ star simply fell.
William Blair’s Sharon Zackfia downgraded the stock to Market Perform, saying the “significant reversal” in performance raises questions about “whether there are bigger – and more difficult – problems afoot, such as whether the company has overpriced or whether the attractiveness of the brand has lost some of its shine.
Some on the Street have lowered their price target but maintain a Buy rating.
“Starbucks is in category one: an established, global brand with good economics, no close competitors and a highly desirable customer base. Issues like these have proven to be fixable over time and provide good buying opportunities,” Saleh wrote in a note to clients after lowering his price target to $100.
Bank of America analyst Sara Senatore also reiterated her “Buy” rating as she expects earnings growth to accelerate again in fiscal 2025 as Starbucks’ latest initiatives “take effect.”
In total, there are currently 13 Buy, 23 Hold and 1 Sell ratings on the Street.
The company revised its 2024 outlook for the third time this fiscal year in its earnings release.
As of the second quarter, Starbucks expects global sales growth in the low single digits for 2024, down from the previous range of 7% to 10%, which itself was below a previous forecast of 10% to 12%.
Global and U.S. same-store sales are expected to decline in the low single digits or remain flat, versus the previous growth range of 4% to 6%. China’s same-store sales are expected to post a single-digit decline, compared to previously expected low-single-digit growth.
Starbucks originally expected same-store growth to be in the mid-single digits across all of its markets.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].
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