SBUX

Starbucks Corporation

86.57
USD
-0.62%
86.57
USD
-0.62%
68.39 117.80
52 weeks
52 weeks

Mkt Cap 102.08B

Shares Out 1.18B

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Why Starbucks Could Continue to Struggle in the Bear Market

There are some stocks that look to be good investments to hang on to amid a downturn and inflation. Starbucks (NASDAQ: SBUX) doesn't strike me as one of those stocks. Year to date, it has fallen 27%, proving to be a worse buy than the S&P 500, which is down just 13%. But as bad as things have been for the business, I wouldn't be surprised if they get even worse. Here's why this could be a bad stock to be holding in this challenging market. Its growth rate has been slowing down Starbucks released its third-quarter numbers earlier this month, for the period ended July 3; sales rose by a modest 9% year over year to $8.2 billion. What's particularly telling is that global comparable-store sales rose 3%, and that was mainly due to a higher average ticket (which was up 6% while comparable transactions declined by 3%). Starbucks has raised its prices multiple times since October due to rising inflation. A quarter earlier, the company's sales grew at a rate of 15% and comparable transactions rose by 3%. Although China's comparable numbers in Q3 were down significantly due to lockdowns (sales declined 44% on a comparable basis) and weighed down Starbucks' numbers, even in North America, comparable transactions were still up just 1% this quarter versus 5% a period earlier. The danger for Starbucks is that slowing demand, and therefore revenue, is not its only problem. Costs are accelerating and could go higher Modest sales growth might be acceptable for investors if the company's costs were tightening, but that isn't the case. Last quarter, operating expenses rose by 13% but revenue by only 9%. The result was that Starbucks' net earnings fell 21% to $912.9 million. Higher supply costs due to inflation could make the issue worse, as could the threat of more of its stores unionizing. In December, a Starbucks store in Buffalo, New York, became the first in the chain to unionize. Since then, more than 200 stores have voted to do so. Putting more pressure on its expenses could mean even slimmer profits for Starbucks. And that makes the stock's earnings multiple even harder to justify. The shares trade at a hefty premium Even with its declining value this year, Starbucks stock trades at 25 times its future earnings. By comparison, investors are paying 18 times future profits for the average stock in the S&P 500. High multiples can be justifiable for businesses that are growing at high rates, but that isn't the case for Starbucks these days. Its profits face significant headwinds from the potential of both stalling revenue growth and rising costs. These headwinds may not last for the long term, and as inflation subsides, the business could get back to normal. However, the effects of unionization could lead to costs that remain with the business for the long haul. And it's still too early to tell how much of an impact that will have on the bottom line, as unionization efforts are still fairly new. Starbucks has more than 15,000 stores in the U.S., so there's potential for many more locations to unionize. Starbucks has become a risky buy The strength of Starbucks' brand is getting tested right now. Sales growth is slowing down, and if the numbers continue declining, it could be a sign that consumers aren't taking the price hikes in stride. Given the record-breaking inflation numbers in the economy right now, I'm not optimistic that Starbucks will be able to keep prices high while also ensuring that sales don't end up declining. Starbucks' high valuation only seals the deal: This is a growth stock that looks too risky to be holding right now. 10 stocks we like better than Starbucks When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* They just revealed what they believe are the ten best stocks for investors to buy right now... and Starbucks wasn't one of them! That's right -- they think these 10 stocks are even better buys. *Stock Advisor returns as of July 27, 2022 David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends the following options: short October 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

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