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Market Insights

Stock of the week: Starbucks

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The brutal selloff in hyper growth stocks has stolen the limelight of late, and there’s really been very few places for investors to see positive returns this year.

Dissecting the market by sector paints the picture. Outside of energy, it’s been tough to stay in the green! Consumer cyclicals, technology and communication have fared the worst by some distance.

sector group performance

In the midst of this, one stock that doesn’t fit neatly into any of the narrative boxes is Starbucks. They’re fighting battles on multiple fronts.

In the last (Q4 2021) earnings report, Starbucks beat on overall revenues ($8.1 billion vs $7.98 billion expected) but missed on the Earnings Per Share (EPS) metric, posting 72 cents vs 80 cents expected. Increasing costs in supply chains & labour costs were the main culprits.

Still, Starbucks COO John Culver was upbeat, saying

“As we saw inflation begin to increase in the middle of this past year, we made the decision to take pricing and implemented it effective Oct. 1,”

“As it grew, we saw that and needed to take additional action effective Jan. 1.”

He confirmed that customer demand had not been affected by the price increases, and anticipated further price hikes throughout the year.

Then CEO Johnson announced his retirement in March, so former CEO (and founder) Howard Schultz returned for his third stint at the helm (albeit only on an interim basis). His experience could be a valuable asset given the challenges currently faced by the company.

As we head towards the earnings report (expected after the close on Tuesday, May 3rd), Starbucks is down over 40% from the July 2021 highs and by >36% year-to-date. The stock price has largely been capped by the 20 day moving average this year.

Strabuck share price daily movement

Schultz's return couldn’t be more timely. One of the first things the founder did was suspend the $20bn share buyback programme:

“This decision will allow us to invest more into our people and our stores — the only way to create long-term value for all stakeholders”

One big challenge is the staggering pace of unionisation among Starbucks workers & stores. In the past 8 months alone (since August 2021), almost 250 Starbucks stores have filed union election petitions with the US National Labor Relations Board (NLRB)! Forty US Starbucks stores have so far voted to unionise.

Shortly after announcing the decision to pause buybacks, it emerged that Starbucks had fired a shift supervisor in Phoenix. Starbucks Workers United branded the decision “blatant retaliation against a union leader”. Internal conflict between workers and management is a huge challenge for any company to navigate, and investors will be keen to hear of any updates on negotiations to resolve this.

Abroad there are challenges too, with China’s lockdowns expected to weigh on sales activity, and the suspension of sales in Russia another headwind to navigate.

On a more positive note, a consumer shift from goods to more services and ‘experience’ spending could help the bottom line and increase confidence that customer demand remains strong despite price hikes.

Starbucks is projected to report adjusted earnings per share of $0.60 for the quarter, with revenue expected at $7.97 billion.

Not investment advice. Past performance does not guarantee or predict future performance.

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