Bitter-Sweet Starbucks

For many Britons, Starbucks (SBUX) is just one of a few large coffee companies on the market. However, in many countries, it is the frontrunning, if not the only, coffeehouse chain. Moreover, in the UK, there are roughly 16 Starbucks locations for every one million people, whereas, in the US and Canada, the number is over three times this. Indeed, Starbucks is the world’s largest coffeehouse chain, boasting a substantial 95 billion USD market capitalisation, as well as over 300,000 employees worldwide and a presence in over 80 countries. But Starbucks has been suffering of late; the company’s stock price has fallen by more than 30% since the start of the year, their latest earnings call has divided analysts, and recent press has been mixed. Nevertheless, Starbucks remains a top-tier company with a well-established business model and an instantly recognisable brand. Investors should keep an eye on Starbucks’ stock in the coming months. 

On the 23rd of February, the Seattle-based coffeehouse chain released its fiscal first-quarter earnings report. Immediately, analysts were divided; the company reported impressive revenues of 8.1 billion USD, up about 19% year-on-year. However, the coffee-kingpin missed its all-important earnings expectations by 0.08 USD per share and, in struggling with inflationary pressures, saw its operating margin fall from 15.4% to 15.1%. All in all, Starbucks’ stock value lost roughly 3% on the 23rd and has seen a further 7.7% dip since. Moreover, the company has been battling with serious stock shortages for some time. Referencing supply chain issues, Starbucks’ COO John Culver admitted that the company expected difficulties to persist in 2022. The firm also seems to have been left with little choice but to pass inflationary pressures on to customers, recently issuing their third price hike since October 2021. 

Additionally, the company has found itself in the news of late. Perhaps most worryingly, their response to recent unionisation attempts has been met with widespread criticism. Internally, Starbucks calls its baristas ‘partners’. This label is technically apt, as, in their first two years, Starbucks’ workers receive restricted stock units (RSUs) of company stock, a practice that started in 1991. However, RSUs do not carry voting rights and Starbucks employees have been more and more vocal about their poor treatment and detachment from management. Stores in New York and Arizona have already successfully voted to unionise and over 100 locations around the US are scheduled to follow suit, including branches in the Starbucks hometown of Seattle. It is the company’s response, however, that is garnering the most attention from investors and media alike. The coffeehouse has opted for an anti-union stance, expressing their conviction that “we are better together as partners, without a union between us”, a decision which some institutional investors such as Trillium Asset Management have urged the company to reverse. 

Despite this, some see Starbucks’ apparent fall from grace as transitory. Earlier this month, for example, Forbes estimated that the company’s revenues would increase a further 10% over the fiscal year. They also predicted increases of over 10% in earnings and net income, valuing Starbucks’ stock at 118 USD per share. If this were the case, then the company would appear to be undervalued by roughly 30%, given its current stock price of 82.73 USD. This view may have something to it. Starbucks’ price to earnings ratio of 22.31 is almost half that of its major US competitor, Dunkin’ Donuts. Nor are Forbes the only ones to see the potential. In late 2021, Trefis, an investment research firm, estimated that Starbucks was worth 124 USD per share and Morningstar, another investment research firm, analyst Sean Dunlop recently argued that “investors [were] over-discounting near-term pressures”. Starbucks certainly can weather the storm; despite their willingness to take on debt, the company has an impressive record of financial prudence, a healthy balance sheet, and a loyal customer base who have not been deterred by recent price rises. The last time shares in the company fell to this level turned out to be a great buying opportunity, as the stock rallied post-pandemic to trade at its highest ever price of 125.97 USD per share. 

Therefore, despite the current questions around the company’s performance and ability to deal with supply chain pressures, investors may do well to keep an eye on the coffee giant. Undoubtedly, Starbucks shares are starting to look cheap, and the company has demonstrated the ability to bounce back in the past. However, their capacity to cope with supply chain issues and keep prices down despite inflation will be tested in the coming months. Accordingly, the company’s next earnings call, likely in late April, will be telling. 

By Jenny Enow-Akpa

Sector Head: Robert Armstrong-Jones