Yahoo Finance Starbucks Stock Up 22% in a Month: Is It Too Late to Jump In?
Starbucks Corporation SBUX has been on a roll lately, with the stock appreciating 21.7% in the past month compared with the Zacks Retail – Restaurants industry’s 7.9% rise. But what’s fueling this caffeine-fueled rally and is it a good time for investors to jump in?
The recent upside was sparked by the company’s announcement that Brian Niccol will replace Laxman Narasimhan as CEO on Sep. 9. Starbucks has faced challenges under Narasimhan, including declining same-store sales in the United States, staffing issues, long wait times and increased competition in China. Narasimhan's focus on non-coffee drinks and technology improvements diverged from former CEO Howard Schultz’s emphasis on coffee and customer experience, leading to the leadership change.
Image Source: Zacks Investment Research
The recent stellar performance puts it ahead of competitors like McDonald's Corporation MCD, Chipotle Mexican Grill, Inc. CMG and The Wendy's Company WEN in terms of price performance in the past month. Yet, SBUX is still trading 11.9% below its 52-week high of $107.66. So, should investors pour more capital into SBUX shares now? Let’s take a closer look.
Factors Fueling Starbucks’ Surge
Brian Niccol is expected to bring valuable experience to Starbucks, having successfully led Chipotle through a turnaround following food safety issues and maintaining strong same-store results. Niccol’s focus on technology, automation and customer engagement aligns with Starbucks’ needs. His experience in driving efficiency and improving customer experiences could help address Starbucks’ current issues, including streamlining operations and enhancing the customer experience amid its complex and diverse menu offerings.
The company’s performance in the U.S. market shows signs of improvement, propelled by a three-part action plan. This includes enhancing store operations to meet new demand, launching new products with targeted marketing and ensuring a high-value customer experience. Operational execution remains a primary focus, with improvements in partner scheduling, turnover and inventory management driving positive momentum across nearly 10,000 U.S. stores. The introduction of Siren Craft systems and operational enhancements are showing early success with significant improvements in key performance metrics. The company plans to accelerate new-store builds and renovations in growth markets to drive growth.
Starbucks' reinvention plan is bearing fruit, with faster service times, fewer customer complaints and more reliable equipment, all contributing to substantial cost savings. These savings are being reinvested into value-driven customer offerings, driving further engagement. The company's digital strategy is also paying off, with the Starbucks Rewards program growing to 33.8 million active members and digital innovations like enhanced wait-time algorithms and expanded Mobile Order & Pay capabilities driving app usage to new heights.
What May Pull Back SBUX Stock?
Investors might consider avoiding Starbucks stock due to underwhelming recent performance, particularly on an international scale. While the company's third-quarter total revenues inched up 1% year over year to $9.1 billion, global comparable store sales declined 3%, including a concerning 14% drop in China and a 2% decline in North America. Operating margins also contracted 70 basis points year over year to 16.7%, reflecting operational inefficiencies.
Despite some positive trends in the United States, challenges persist, especially in China. The impacts of heightened competition, a cautious consumer environment and aggressive price wars have put pressure on performance. Although management is optimistic about long-term improvements through various operational initiatives, such as the Siren Craft systems rollout and expanding new store builds, these efforts are still in their early stages. They may take time to materialize into tangible financial benefits.
Starbucks faces significant headwinds internationally, with mixed results across regions like the Middle East, Southeast Asia and parts of Europe, coupled with continued brand misperceptions in these markets. While the company's actions to revitalize its operations are underway, current uncertainties and weak international performance suggest investors may want to stay on the sidelines until clear signs of a sustained recovery emerge.
Valuation and Market Signals
The company is currently trading at a forward 12-month price-to-sales ratio of 24.30X, well above the industry average of 24.11X.
Image Source: Zacks Investment Research
Technical indicators are supportive of SBUX's performance. The stock is currently trading above its 50-day moving average, indicating strength in upward momentum and price stability.
Image Source: Zacks Investment Research
Bottom Line: To Sip or Skip?
Starbucks' recent performance reflects strong operational momentum driven by strategic enhancements in the U.S. market and digital innovations. The company's focus on improving store operations and supply chain efficiencies yielded positive results, positioning it well in a recovering restaurant industry. However, international challenges, particularly in China and mixed results across other regions underscore headwinds.
While Starbucks’ premium valuation reflects its strong U.S. market performance, the mixed international outlook presents a complicated picture. For long-term investors who believe in the company’s ability to overcome these challenges and maintain its growth trajectory, Starbucks may offer compelling value. However, new investors might prefer to wait for more consistent signs of recovery, particularly on the international front, before diving in.
SBUX currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Starbucks Corporation (SBUX) : Free Stock Analysis Report
McDonald's Corporation (MCD) : Free Stock Analysis Report
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
The Wendy's Company (WEN) : Free Stock Analysis Report
