Starbucks (NASDAQ:SBUX) stock is fresh off a mixed third quarter of results that saw sales and comparable store sales (comps) fall short of expectations, thanks in part to subtle weakness in the U.S. market. Indeed, SBUX stock has cooled off in a significant way this summer, partially because of consumer-facing headwinds, but various analysts expect Starbucks stock to heat up from here as the company gets back on the growth track under its new leader and CEO, Laxman Narasimhan.
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Indeed, Starbucks served up a rather lukewarm quarter, but it’s one that should be forgiven by investors as the company continues pushing forward with its plans to reinvigorate growth and margins.
At writing, many analysts are relatively bullish on SBUX, with a Moderate Buy consensus rating. I’m inclined to take a similar stance as Starbucks moves forward with its reinvention plan under its new leader.
Starbucks’ Q3 Saw Sales Slip, but There Were Notable Positives
For Q3, the Seattle-based coffee giant clocked in adjusted earnings per share (EPS) of $1.00, topping the consensus of $0.95. However, revenue of $9.2 billion (up 12% year-over-year) came in just shy of estimates calling for $9.3 billion. On the surface, Q3 did not seem like anything to write home about. Pay more emphasis on the sales slip in the U.S., if you will, but I believe it’s a mistake to ignore the impressive 46% growth out of China. Further, Laxman Narasimhan sounded as confident as ever in Starbucks’ trajectory from here.
As a part of the Q3 earnings call, Mr. Narasimhan noted the company has “multiple paths” to “drive significant growth and margin improvement” to create “long-term shareholder value.” Indeed, Starbucks may need to deal with lingering margin-impairing headwinds (higher labor and input costs) moving forward. However, such headwinds seem unlikely to last for too long as the company continues its push into the lucrative Chinese market while embracing various automation opportunities.
Undoubtedly, Narasimhan may be relatively new on the job, but he’s a top boss who’s worth giving the benefit of the doubt. He’s been in the trenches, working as a barista on select days, and looks well-equipped to tackle the slew of company-specific (think strikes) and macro pressures (in the U.S. and China) that have been weighing down the firm well before Mr. Naraimhan was at the helm.
The latest results mark Mr. Narasimhan’s second quarter as CEO of Starbucks. Indeed, the Q3 results were somewhat less impressive than Q2, but it’s an EPS beat nonetheless in a fairly challenging quarter.
As Consumers Recover, Starbucks Could Quickly Find Itself at New Highs
As consumer spending heats up again (I believe Amazon’s (NASDAQ:AMZN) spectacular second quarter signifies that the consumer is alive and well), I’d look for the industry tides to turn back in Starbucks’ favor, perhaps far quicker than many expect. Undoubtedly, shifts in discretionary spending tend to come quite quickly. With that, some investors who wait until after strong results are delivered stand to miss out on the most sizeable upside moves.
Though Starbucks’ third quarter was technically a top-line miss, I find it remarkable that “complex coffee drinks” experienced record demand. Complicated drink orders full of add-ons from Starbucks do not come cheap, especially after the recent wave of inflation! They’re quite an unnecessary splurge that doesn’t seem to indicate an imminent recession.
With tested consumers that seem to be showing subtle signs that they’re ready to loosen the purse strings again, I view the current risk/reward in SBUX stock as favorable from here despite the underwhelming third-quarter headline numbers.
Is SBUX Stock a Buy, According to Analysts?
On TipRanks, SBUX stock comes in as a Moderate Buy. Out of 22 analyst ratings, there are eight Buys and 10 Holds. The average Starbucks price target is $116.18, implying upside potential of 15.4%.
Bank of America Securities analyst Sara Senatore stands out as one of the bigger bulls on Starbucks. Just a few days ago, she reiterated her Buy rating on the stock, with a Street-high price target of $150.00, which implies a massive 49% upside move from here.
The Bottom Line on Starbucks Shares
Don’t make too much of Starbucks’ latest lukewarm quarter. The stock seems to be going flat again but could be in a spot to retest its highs over the next year if the consumer is, in fact, poised to continue recovering from a slump.
Once Chinese and American consumer spending gets on the same page, it may be too late to seize today’s modest price of admission. At writing, SBUX shares trade at 24.8 times forward price-to-earnings, which is in line with the restaurant industry average of 24.3 times.
