Starbucks: Indicators Turns Bearish, New Lows in Sight

Key Points

• Starbucks struggled in Q1 and underperformed consensus, lowering guidance for the year.
• Analysts are lowering their price targets, but this market still has a double-digit upside potential. 
• Starbucks trades below the analysts' lowest target, suggesting a deep value opportunity for investors.  

Starbucks NASDAQ: SBUX is one of many consumer-forward businesses that indicate weakness in the consumer. McDonald’s NYSE: MCD and Kraft Heinz NASDAQ: KHC revealed tepid results in fast food and consumer staple products, suggesting the squeeze is real and consumer health flagging. The difference is that Starbucks’ results were so far below expectations that they altered the full-year outlook, which is likely not an isolated incident. 

Starbucks may be the only one to show significant contraction this quarter, but who will be added to the list next, after another ninety days of “higher for longer” policy and 4% consumer inflation? The FOMC may be on track to cut rates, but rate cuts are unlikely before September. Consumers will continue to feel the pinch and cut back on their spending. Lattes got cut from budgets in Q1, a trend likely to continue; what business will be next?

Starbucks Builds Leverage, Demand Slows

Starbucks struggled in Q1, a recurring theme across segments and industries. The company wasn’t expected to post robust results, but the $8.56 billion in revenue is down 1.8% compared to last year and 650 basis points shy of the consensus. Globally, comps are down 4% and offset by a 3% increase in store count, 364 of which were added in Q1. 

Starbucks comps are down on a 6% decline in traffic, a worrisome detail, offset by a 2% increase in ticket average. The ticket average is up on higher prices. US comps, the largest market, are down 3%, with international down 6%. China, the 2nd largest market, is down 11% and is 18% of the net. 

The margin news is also unfavorable to shareholders today. The company logged triple-digit basis point declines in the GAAP and adjusted operating margin to leave adjusted and GAAP earnings at $0.68. That is shy of the consensus by $0.12 and down 8%, more than quadrupling the top-line contraction. 

The weakness in Q1 was compounded by the guidance, adding to the stock’s steep decline. The company cut its outlook for revenue, comp store growth, store count growth, and margin. The company sees revenue growing in the low single-digits compared to high-single to low-double, with US comps running near 1% and margin flats instead of improving.  Bottom line, the bottom line outlook for this year is garbage and will be revised sharply lower. If this becomes a broader trend among discretionary/consumer names, it will undercut the outlook for S&P 500 earnings and broad market support.

Analysts Cut Targets For Starbucks: A Deep Value Opportunity? 

Analysts rate Starbucks at a consensus Hold and see it gaining a 40% upside on average. However, the post-release activity includes at least one downgrade and numerous price target reductions; Marketbeat tracks no price target increases. The new targets are below the consensus, suggesting an upside but less than 40%. However, the stock is trading below the low end of the range, which is unchanged, indicating a deep-value opportunity. The question is how much deeper the stock may fall and how long to wait until it rebounds. 

The technical action is strongly bearish, creating a gap and a large red candle. The market will likely fall from the day’s lows, but support is near. Support targets near $70, and the 2022 lows should be strong enough to keep the market from falling further. If not, this stock could fall to the pandemic lows near $56. Assuming the market rebounds from critical support or higher, the first target for significant resistance is near $80 to $82, with numerous potential targets for resistance up to the $110 region.