Key points
- Starbucks Posted Solid Quarter But Failed to Meet Consensus; other headwinds to stock price action remain.
- Growth is present and expected to continue, but is muted due to slow comp store growth in critical regions.
- While there are many reasons for the stock’s rally, the chart tells a different story with the potential for new lows in the picture.
- 5 stocks we like better than Starbucks
Starbucks Corporation NASDAQ: SBUX stock prices perked up after the release and Q1 guidance, but no new highs are in sight. The results were mixed, weak compared to analysts’ consensus figures, but whispers expected much worse, so the stock rose. The bottom line is that growth remains on the table and that the Triple-shot reinvention program is seeing success and generating value. However, a significant headwind for this consumer discretionary business could dampen price action in 2024.
Starbucks reported a solid quarter despite missing consensus
Starbucks reported a solid quarter, which delivered revenue growth, margin expansion and earnings improvement compared to last year. The problem is that $9.4 billion in revenue is 250 basis points below consensus due to comp sales. weaker than expected.
Composites are up, but only 5% globally, with US up 5% and international up 7%, including China.
Revenue increased 7.9% year-over-year (YOY) due to improving traffic averages. Traffic increased in part due to the number of stores, which increased 1.4% for the quarter and 3% year over year. Loyalty and promotions are also at play, with U.S. membership growing by 13%. Proof of the brand’s strength lies in gift card sales, which topped $3.6 billion to set a record; Starbucks gift cards are the #1 seller. 2 in the category.
The margin news is the most impressive and key to explaining why the stock rose 5% in early trading. Operating margin increased 140 GAAP and 130 adjusted basis points to leave GAAP earnings up 22% and adjusted 20%.
The guidance is the other reason Starbucks shares exploded in early trading. The company lowered its revenue target for the year, bringing the new high in line with the previous low of 10%, but maintaining its earnings outlook. It puts the consensus target of $4.10, which assumes 15% growth, into play. The target may be cautious, given the prospects for growth in the number of stores. Store growth accelerated 10% year over year in the first quarter and is expected to remain strong throughout the year.
Narrow analyst outlook for SBUX: 15% upside possible.
Analyst response to Starbucks’ first-quarter results is mixed, with upward and downward price target revisions entering the picture.
However, the revisions are narrowing the range centered on a consensus stock price of $112 and not lowering the consensus. This figure has remained relatively stable through mid-to-late 2023, implying 15% upside for the stock. Post-release reviews include reports from Wedbush, Citigroup Inc. NYSE:C, Barclays PLC New York Stock Exchange: BCS and BTIG.
Dividends are one of the reasons analysts remain interested in the stock. The payout is worth 2.4% to investors, with the stock trading at a relatively high 23 times on this year’s earnings outlook. Payout seems safe and share buybacks compound it, but there are risks.
Stock buybacks barely cover stock-based compensation and equity issuance, reducing the count by just 1% year-over-year by the end of the first quarter, compounded by a troubled balance sheet leading to significant losses and a larger deficit of the shareholders.
The technical outlook: Starbucks could hit a new low
For all the reasons to believe Starbucks’ stock price could rise in 2024, the technical stock disagrees. The market rallied following the first quarter result but quickly sold off confirming significant resistance at the 150 and 30 day EMAs.
The candlestick formation aligns with the downtrend that began in 2021 and suggests that recent lows will be retested for support. The market could drop through the $90 range and then drop to $80 or lower. In this scenario, solid support could only be reached at the $70 level. If support holds at the bottom of the existing trading range, a bounce could form later in the year.
Before you consider Starbucks, you’ll want to hear about it.
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