Can Starbucks shares rise 55% to their pre-inflation highs?

(Note: Starbucks’ 2023 fiscal year ended October 1)

Starbucks Stock (NASDAQ: SBUX), the world’s leading roaster, distributor and retailer of specialty coffee, is currently trading at $81 per share, approximately 36% below its level of $126 seen on July 26, 2021 (pre-inflationary shock ), and has earning potential. Starbucks reported adjusted EPS of $0.68 for the second quarter of fiscal 2024, well below the consensus of $0.80 (down 7% year-over-year (yoy)), primarily due to of low net revenue of just $8.6 billion (down 2% year-over-year and 6.5% below consensus). ) and a drop of 240 basis points in operating margin. Indeed, the coffee king’s operating margin in the second quarter was only 12.8%, well below the ten-year average of 15.1%. Additionally, company-wide comparable sales decreased 4.0%, driven by a 6% decline in total transactions, partially offset by a 2% increase in average spend per customer. Rising costs of operating its stores, intensified promotional activities and rising salaries are mainly responsible for this rather poor result. China saw the worst decline in comparable sales (-11%) in the second quarter. Given that 18% of all SBUX stores are in China, this geography remains a challenge for the company.

Due to disappointing second-quarter results, Starbucks lowered its full-year outlook. The company now forecasts low-single-digit revenue growth for fiscal 2024, down from its previous range of 7% to 10% year-over-year growth. It is worth mentioning that inflationary pressures played a significant role in the company’s weak second-quarter results. Starbucks stock is down nearly 15% year to date. In comparison, SBUX’s counterpart McDonald’s shares (NYSE:MCD) is down 12% since the start of this year. In light of this year’s decline, shares are currently trading at an attractive price-to-earnings ratio of just ~22 (compared to an all-time high in the 20s). We believe the coffee company’s stock could see long-term gains, given that it continues to grow in the U.S. and has substantial growth potential in China and beyond. All told, Starbucks has consistently increased its dividend since it began paying one in 2010, and it will likely continue to increase in the future.

SBUX stock has faced a notable 25% decline, going from $105 in early January 2021 to around $81 today, compared to a roughly 40% increase for the S&P 500 over that roughly 3-year period. . However, the decline in SBUX stock is far from consistent. The stock’s returns were 9% in 2021, -15% in 2022 and -3% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022 and by 24% in 2023. indicating that SBUX underperformed the S&P in 2021 and 2023.

Actually, consistently beating the S&P 500 – in good times and bad – has been difficult in recent years for individual stocks; for consumer discretionary heavyweights including AMZN, TSLA and TM, and even for mega-cap stars GOOG, MSFT and AAPL. On the other hand, the Trefis High Quality Portfolio, with a collection of 30 stocks, has has outperformed the S&P 500 every year during the same period. Why is that? As a group, stocks in the HQ portfolio have generated better returns with less risk relative to the benchmark; it’s less of a roller coaster, as evidenced by headquarters portfolio performance metrics. Given the current uncertain macroeconomic environment, characterized by high oil prices and high interest rates, could SBUX face a similar situation as in 2021 and 2023 and underperform the S&P over the next 12 months – or will it recover?

Returning to the pre-inflation shock level means that SBUX will now need to gain around 55%. Although it has the potential to return to these levels over time, we believe SBUX valuation be around $80 per share, almost in line with the current market price. Our detailed analysis of The post-inflation shock to the rise of SBUX captures the company’s stock trends during the turbulent market conditions seen in 2022 and compares these trends to stock performance during the 2008 recession.

Inflationary shock 2022

Timeline of the inflationary shock so far:

• 2020 – early 2021: The increase in the money supply to cushion the impact of lockdowns led to strong demand for goods; the producers could not compete.
• Early 2021: Shipping issues and labor shortages due to coronavirus pandemic continue to hurt supply
• April 2021: Inflation rates exceed 4% and are rising rapidly
• Early 2022: Energy and food prices rise due to the Russian invasion of Ukraine. The Fed begins its process of raising rates
• June 2022: Inflation levels peak at 9%, the highest level in 40 years. The S&P 500 index is down more than 20% from its record levels.
• July – September 2022: The Fed raises interest rates aggressively, leading to an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: the Fed continues its process of raising rates; Improving Market Sentiment Helps S&P500 Recover Some of Its Losses
• Since August 2023: The Fed has kept interest rates unchanged to ease recession fears, and is preparing for rate cuts in 2024.

In contrast, here is how SBUX stock and the market as a whole performed during the 2007/2008 crisis.

Chronology of the 2007-08 crisis

• 10/1/2007: Approximate pre-crisis peak of the S&P 500 index
• 09/01/2008 – 10/01/2008: Accelerated market decline corresponding to Lehman’s filing for bankruptcy (09/15/08)
• 01/03/2009: Approximate low point of the S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 09/01/2008)

Performance of the SBUX and S&P 500 during the 2007-08 crisis

SBUX stock fell from nearly $13 in October 2007 (pre-crisis peak) to nearly $5 in March 2009 (when markets bottomed), implying that SBUX stock lost almost 65% of its pre-crisis value. It has risen since the 2008 crisis to levels of around $12 in early 2010, increasing around 152% between March 2009 and January 2010. The S&P 500 saw a 51% decline from levels of $1,540 in September 2007 to $757 in March 2009. It then increased by 48% between March 2009 and January 2010 to reach levels of $1,124.

SBUX fundamentals over the past few years

SBUX revenue grew from $29.1 billion in 2019 to $36 billion in fiscal 2023, striking a healthy balance between increased customer traffic and increased spending during this period . Earnings per share increased slightly to approximately $3.60 in fiscal 2023 from $3.56 in fiscal 2019.

Conclusion

With the Fed’s efforts to rein in runaway inflation rates helping market sentiment, we believe SBUX stock has the potential to make strong gains once fears of a potential recession subside.

It’s helpful to see how your peers stack up. SBUX Peers shows how SBUX stock compares to its peers on important metrics. You’ll find more useful comparisons for businesses across all industries at Peer Comparisons.

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