Starbucks: The Consumer Is Struggling With Pricing (NASDAQ:SBUX)

Thesis In A Nutshell

Starbucks (NASDAQ:SBUX) is set to report earnings for the company’s Q2 2024 quarter on April, 30th, after the market closes; and similar to the Q1 2024, the world’s leading coffee chain is likely to disappoint against consensus estimates. In my opinion, Starbucks has faced a challenging Q1 in 2024, as elevated prices continued to affect customer frequency and overall sentiment towards the brand​​. Moreover, the economic sales pressure was likely further exacerbated by young consumers’ reactions to misinformation regarding Starbucks’ stance on international political issues, which had a negative impact on consumer sentiment​​. That said, while I remain positive on Starbucks long-term ability to drive a recovery in commercial momentum, I assign a “Hold” rating to SBUX stock heading into Q1 reporting.

For context: Starbucks stock has strongly underperformed the broader U.S. stock market, YTD. Since the start of the year, SBUX shares are down approximately 8%, compared to a gain of about 7% for the S&P 500 (SP500). Moreover, since I last covered Starbucks stock with a “Buy” rating (February 2023), shares are down about 13%, likely as a consequence of the headwinds discussed in this article.

Q1 Sales Likely Softer Than Expected

According to various survey insights from leading investment banks, Starbucks has likely faced a challenging first quarter period, as macro concerns and price sensitivity have pressured customer frequency and consumer sentiment towards the brand. Specifically, I highlight that according to research conducted by Evercore ISI, Q1 visitation intent dipped notable compared to previous quarters, likely down 5-10% QoQ. (Source: Evercore ISI research note dated April 15th: The Starbucks Consumer).

While much of the softness in visit intent is likely anchored on general macroeconomic weakness, investors should not ignore the possibility that Starbucks has likely overstretched its customers price sensitivity. In fact, pointing once more to the Evercore ISI research, I highlight that close to 64% of Starbucks consumers have “definitely” noticed price increases, which may likely have pressured sentiment towards consumption intent.

On that note, Evercore’s research is very much in line with survey feedback seen in UBS’ Evidence Lab, where 50-55% of respondents indicated that “Saving money” is the primary reason for visiting Starbucks stores less often (Source: UBS research note on SBUX, dated April, 22nd: Pressures Likely Continue; Focus on Inflection).

At the same time, respondents suggested that a “lower effective price” would help restore positive momentum in store visits.

At the risk of repeating myself, I highlight one more research paper that suggests negative sentiment on Starbucks pricing strategy. According to Deutsche Bank’s Starbucks’ brewing tracker (emphasis mine):

[the] Top reason for lower consumption is related to price: Among the 45% of consumers buying less or no longer buying from Starbucks in March, the top reason for lower consumption is related to price, with 47% saying “it’s become too expensive

(Source: Deutsche Bank Research Note On SBUX, dated 10th April: Brew Tracker: March 2024)

Another point of concern that has likely contributed to weaker than expected sales in Q1 is likely anchored on consumers’ perception of Starbucks’ stance on international political issues, most notably the Middle East Conflict. As Guggenheim pointed out in a recent research note (emphasis mine):

We looked at Apptopia’s keyword count in Google’s Play Store and Apple’s App Store reviews for the Starbucks App. From Oct. 1 to Dec. 31, the most mentioned word in reviews of the app was “Starbucks”, followed by “genocide” and “Palestine” ahead of other terms like “reward”, “password”, and “login” This dynamic was less severe over the subsequent several months, with “genocide” as the eighth most mentioned word over the calendar 1Q (F’2Q) and not in the Top 20 in March. However, the fact that “Starbucks + genocide” and “Starbucks + boycott” in Google Trends continued over the past few weeks to get 15-25% of the mentions as they got in November and December suggests some level of ongoing customer pushback. We remain confused as to why Starbucks became a lightning rod for political criticism but suspect a younger customer demographic skew has contributed to this headwind for the brand.

(Source: Guggenheim research note on SBUX, dated April 18th: SBUX: The Chai Chai Slide; Trimming Estimates)

Cavenagh’s Expectations For SBUX’s Q1

Looking at Starbucks upcoming earnings release for the second quarter of 2024, I expect revenues to be in the range of $8.7-8.9 billion, down about 1-3% QoQ, and approximately $200 million/ 2% below consensus. On profitability, I expect margins to remain broadly flat vs. the Q1 quarter; and thus, I project EPS in the range of $0.85-0.9. On a qualitative perspective, I expect that Starbucks’ conference call with analysts will focus predominantly on strategies to restore commercial momentum and consumer engagement. On that note, I expect management to provide insights on how the company is adjusting its strategies to enhance digital engagement and menu innovation. Moreover, Starbucks is poised to introduce targeted offers to encourage occasional customers to join their loyalty program and to leverage AI for hyper-personalized marketing.

Investor Takeaway

Starbucks is scheduled to announce its Q1 2024 earnings on April 30th, after the market closes. Like Q1 2024, the world’s leading coffee chain is expected to fall short of consensus estimates. According to various insights from survey data, first quarter of 2024 has been tough for Starbucks, with high prices continuing to deter customer visits and dampen overall brand perception. Additionally, consumers’ reactions to Starbucks’ (perceived) international political position have likely compounded economic pressures. As a consequence of these insights, I recommend a “Hold” rating on SBUX stock.