Starbucks (SBUX) has recently navigated a challenging period, with its stock price approaching its 52-week low multiple times this year. In a move to reignite growth, the board of directors introduced Brian Niccol, formerly CEO of Chipotle (CMG), as the new leader, accompanied by a significant compensation package. This announcement spurred a notable stock surge. As Niccol officially took office on September 9th, investors are now weighing their options: is it the right time to buy Starbucks stock, or is it wiser to wait for more definitive signs of a turnaround? This analysis suggests that SBUX presents a compelling buying opportunity, and the following points will elaborate on this perspective.
Recent Performance of Starbucks Stock: A Closer Look
My optimistic view on Starbucks (Nasdaq: SBUX) has strengthened recently, particularly in September, which marked a turning point for the company’s stock trajectory. The appointment of Brian Niccol as CEO propelled the stock into positive territory for the year, recovering from a dip of up to 20% by the end of July. However, it’s important to note that the stock still remains approximately 22% below its historical peak.
A significant factor contributing to this downturn was recent earnings reports indicating a decrease in comparable store sales across major retail chains, Starbucks included. Many analysts attribute this trend to cautious consumer spending. While companies like Target (TGT) and Home Depot (HD) reported declines in recent quarters, Walmart (WMT) demonstrated growth, indicating a change in consumer purchasing habits rather than a broad market collapse.
Starbucks’ latest quarterly report revealed a 2% decrease in North American comparable store sales, with transaction counts falling by 6% year-over-year, adjusted for price increases and sales mix. Overall, Starbucks experienced a 4.2% year-over-year decrease in company-wide operating income, down to $1.52 billion, along with a 70 basis point decrease in non-GAAP operating margin. Notably, the international segment saw a steeper decline in operating margins, falling by 340 basis points to 15.6%.
In response to these challenges, Starbucks has projected a low single-digit decline in global comparable sales, with China showing particularly weak performance. To counteract this, the company plans to accelerate store openings, targeting a 12% increase in locations in China by the end of fiscal year 2024.
Evaluating Starbucks’ Potential Turnaround and Growth
The idea of a “turnaround” at Starbucks might be overstated and doesn’t fundamentally alter the positive outlook for SBUX stock. While comparable store sales have declined, this appears to be more reflective of broader consumer trends than inherent weaknesses within Starbucks itself. Despite these headwinds, Starbucks continues to demonstrate robust performance, particularly in its ability to generate cash.
Starbucks offers a dividend yield of 2.34%, translating to $2.55 billion in cash flow. This dividend appears sustainable, supported by the company’s $3.6 billion in free cash flow generated last year, with an average of $2.81 billion over the past five years. Assuming consistent free cash flow at last year’s levels, Starbucks can comfortably maintain its current dividend payouts.
However, acknowledging recent quarterly results, Starbucks recognized the need to address growth revitalization, leading to the appointment of Brian Niccol as CEO. Niccol’s track record is notable, having successfully guided Chipotle through a significant recovery following its food safety crisis. Under his leadership, Chipotle’s revenue more than doubled from $4.86 billion in 2018 to $9.8 billion in 2023. Chipotle also expanded its locations from 2,048 in 2017 to over 3,400 last year. It’s worth noting that Chipotle was in a high-growth phase during this period, presenting different challenges compared to Starbucks’ more established market presence. However, Niccol’s experience in driving growth and operational improvements is highly relevant as Starbucks seeks to navigate its current challenges and accelerate future expansion.
SBUX: Continued Expansion Amidst Market Fluctuations
Further reinforcing the bullish perspective on Starbucks, the company demonstrates ongoing expansion despite current market pressures. With nearly 40,000 stores globally, a 6% year-over-year increase, Starbucks is far from a standstill. Brian Niccol’s leadership could potentially replicate the growth trajectory seen at Chipotle, particularly if he focuses on strategic new store openings and market penetration. Starbucks aims to add 17,000 stores by 2030, increasing its global footprint by approximately 40%.
However, recent net income figures for Starbucks show a pattern of stagnation, with a compound annual growth rate (CAGR) of 2.7% over the past five years. Looking forward, analyst projections estimate earnings per share (EPS) growth between $3.55 and $4.44 from fiscal year 2024 to 2026, indicating a potential 25% increase during this period. Revenue growth is projected to increase by 15% over the same timeframe, from $36.5 billion to $42.2 billion. While inflationary pressures may increase costs, Starbucks’ planned expansion should help offset these impacts and drive overall revenue growth.
A key strength for Starbucks is its impressive return on invested capital, currently at 32.4%. This signifies that investments in the business generate substantial returns, a critical factor as the company plans to increase its store count significantly. Sustaining these high returns suggests that analyst projections might even be conservative, indicating further upside potential for SBUX stock.
Comparing future earnings projections to the current stock price, Starbucks is trading at a P/E ratio of 27.2x and a forward P/E ratio of 22x for 2026. These figures are notably below the historical average of 29x over the past five years, suggesting that the stock is currently undervalued and presents an attractive entry point for investors.
Wall Street’s Consensus on SBUX Stock
According to TipRanks, the analyst consensus on SBUX stock is a Moderate Buy. Among the 24 analysts covering the stock, 15 recommend a Buy rating, seven suggest a Hold, and two advise a Sell. The average SBUX price target is $100.75, indicating a potential upside of 3.34%.
Final Verdict: Why SBUX is a Buy
Despite recent weaker performance reflected in same-store sales—an issue primarily attributed to shifts in consumer behavior rather than fundamental problems within Starbucks’ strategy—the company appears well-positioned for a growth recovery, especially under the guidance of new CEO Brian Niccol.
While the current valuation might not be as deeply discounted as it was in previous months, Starbucks’ ongoing global store expansion plans and high return on investment are likely to positively influence its EPS multiple in the future. From a long-term investment perspective, this presents a compelling opportunity, particularly given that the current valuation remains below its historical averages.
