Starbucks is one of the favorite companies for both customers and investors. In addition to offering so many varieties of good quality coffee, the US company usually gives very attractive products as well as its dividends. Despite the problems suffered by the economy due to high levels of inflation and several closures by Covid, it would seem that Starbucks stock may be promising.
Starbucks had a rough time in China
Starbucks released its fiscal first quarter 2023 results last week. Its shares fell rapidly in post-release trading, the main reason being poor sales in China. The company has 6,090 stores in China, far fewer than the 15,952 stores in the US, and sales in the Asian country were down 29% year-over-year; resulting in a disappointing first fiscal quarter of 2023.
In the face of the adversity Starbucks faced, Howard Schultz, the company’s CEO, gave a conference call where he spoke about the poor quarterly sales in China. “In early December, Covid zero was lifted, and Covid infection skyrocketed across China, leading to a dramatic decline in consumer activity across the country,” he said. “Nearly 1,800 Starbucks stores were closed during that month,” he added.
This scenario even led the investment management company Polen Capital to liquidate their position in Starbucks.
Gradually, China has been recovering economically from the closures across the country. Despite not doing well at all, it can be inferred that Starbucks’ sales problem in the country is temporary. Little by little the routines of Chinese people are returning to normal and it is a matter of time before people stop by the Starbucks store of their choice to buy their coffee before starting the workday. As Schulz said, “the huge consumer demand in China is waiting to be unleashed.”
No one can predict the future; therefore, it is not known whether or not a new wave of mass Covid-19 contagions will appear in China. Assuming nothing extraordinary happens and “familiar pre-Covid lifestyles” return, the good news for Starbucks will come.
Starbucks remains strong
Putting aside the situation the coffeehouse chain has been going through in China recently, Starbucks has been performing very well in the rest of the world.
To satisfy its shareholders, the company provided some interesting data. Excluding China, Starbucks’ comparable store sales for the first fiscal quarter of 2023 were up 5% worldwide, 10% in the US, and double digits internationally.
Even taking into account the closures for Covid in China, the company’s quarterly sales reached $8.7 billion, which was close to the specialists’ estimate of $8.79 billion.
Starbucks earned $0.75 per share, just $0.02 below Wall Street’s estimate of $0.77 per share. Thus, it is clear that Starbucks’ performance could have been better. To top it off, with these results the company still pays its investors a dividend of around 2%. If the problems in China are resolved, Starbucks will likely have positive quarterly results.
How has inflation impacted Starbucks?
Rachel Ruggeri, Starbucks CFO, recently clarified the company’s inflation situation. Although many believe that the company has indeed been affected because coffee may come to be considered a luxury, the CFO was blunt. “We are not seeing a problem with our demand,” she said.
Starbucks prices indeed rose 5% year-over-year in Q4 2022; however, customers have been willing to pay for their coffee. The situation becomes fully clear when looking at the company’s sales outside China.
Because of the company’s strong performance, there may be a change in pricing. “In the second half of the year, we will start to see prices return more to their historical levels,” Ruggeri said.
How will Starbucks stock do in 2023?
Investors were dissatisfied if the company’s 2022 results are anything to go by. Shareholders saw several discouraging news with Starbucks, such as slowing growth, falling profit margins, and declining cash returns. However, the 2023 outlook for the coffeehouse chain may be completely different.
Starbucks leaders see big profit opportunities for fiscal 2023. In early February, executives reaffirmed their outlook for growth and profits, despite increasing pressure on consumer spending.
Similarly, Wall Street is cautiously optimistic that Starbucks can return to its previous growth levels. Specialists give the coffee giant’s stock a “Moderate Buy” rating. The average price target for Starbucks shares is $114.25, which implies a 7.7% upside potential.
Is it a good time to invest in Starbucks stock?
Although the company had to go through some headwinds, Starbucks seems to be far from failing.
The earnings report alerted many people, which is why they sold their stocks. Nevertheless, the coffee chain has proven to be resilient to problems, and it is likely that after its revival in China, the numbers will go up. The outlook looks good for the coffee giant to get a comeback in 2023.
What are your thoughts on this? Do you think it is a good time to buy some Starbucks stocks?
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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)
