Is Starbucks Stock a Buy, Sell or Retain at 24.79x P/E?

Starbucks Corporation's SBUX stock is trading just below the Zacks Restaurant industry.  With a forward 12-month Price/Earnings ratio of 24.79x, it sits marginally below the industry average of 24.97x. Despite this, SBUX remains priced higher than the broader Retail-Wholesale sector, which stands at 23.96x and the S&P 500, which averages 21.86x.

In the past three months, Starbucks' shares have surged 25.2% compared with the restaurant industry's 10.9% rise and the S&P 500's 4.7% rise. Even among the top industry players, SBUX stands tall, outperforming McDonald's Corporation, which rose 19.2%, and leaving Chipotle Mexican Grill, Inc. CMG, down 7.3%, and Yum! Brands, Inc. YUM, up 4.2%, in the rearview.

Stock Price Performance

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Technical indicators suggest continued strong performance for SBUX. The stock trades above its 50 and 200-day moving averages, signaling robust upward momentum and price stability. This technical strength underscores positive market sentiment and confidence in SBUX's financial health and prospects.

50 & 200-Day Moving Averages

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Brian Niccol's Leadership: A Game Changer for SBUX

Starbucks' recent stock rally can largely be attributed to the appointment of Brian Niccol as its new CEO, succeeding Laxman Narasimhan. Niccol, known for his successful leadership at Chipotle, where he guided the company through a significant turnaround and drove strong same-store sales growth, brings a wealth of experience to Starbucks.

His expertise in leveraging technology, automation and customer engagement is a perfect fit for Starbucks' evolving needs. Niccol's strategic focus on efficiency and customer experience is expected to streamline operations and elevate the customer journey, which is crucial for managing Starbucks' expansive and intricate menu offerings.

Expansion Efforts to Aid SBUX

The company is continuously focusing on expansion to drive growth. In the fiscal 2020, 2021, 2022 and 2023, the company added 1,400, 1,173, 1,120 and 2,327 net new stores, respectively. During the first-, second- and third-quarter fiscal 2024, the company opened 549, 364 and 526 net new stores. This brings the total global store count to 39,477 as of June 30, 2024, with 52% company-operated and 48% licensed stores. For the fiscal 2024, management projects global store growth to be approximately 6%.

Starbucks' focus on operational excellence, backed by a reinvention plan, resulted in significant improvements. During the fiscal third quarter, out-of-the-window times have improved year over year, customer contact center calls for long order times have been reduced (by nearly 50%) and Mobile Order & Pay and delivery uptime rates have reached 99%. These indicators reflect efforts to enhance customer wait times, product availability and the overall customer experience.

Menu Innovation Aids SBUX

In the third quarter, the company experienced a boost in store traffic due to a strong and innovative lineup of products and effective marketing strategies. Their share of cold beverages inched up 1% year over year, accounting for 76% of their beverage sales for the quarter. Customers responded positively to the new Summer-Berry Starbucks Refreshers with Pearls and the revamped iced coffee. Additionally, cold espresso products saw 4% growth year over year.

Building on its successes from the second quarter, SBUX is continuing to expand its product pipeline over the next two years while speeding up innovation. Acknowledging the rising popularity of energy drinks, they introduced new handcrafted iced energy beverages in U.S. locations.

Looking ahead to the fourth quarter, the company anticipates that its product offerings, including the highly-anticipated return of pumpkin spice and targeted marketing efforts, will attract more customers and enhance engagement with new and loyal patrons.

Comps and Margin Pressure Hurts SBUX

Starbucks is struggling with a slower recovery in China, facing fierce competition from value-oriented rivals. Global comparable store sales fell 3% in third-quarter fiscal 2024 year over year, driven by a 5% decline in transactions, despite a 2% rise in average ticket size. North America and International sales also decreased by 2% and 7%, respectively, due to cautious consumer spending. The company expects these challenges to persist, forecasting low single-digit declines to flat growth for global and U.S. comps in 2024, with China's comps projected to drop 12%.

Starbucks' adjusted operating margin declined to 16.7% in third-quarter fiscal 2024, down 70 basis points from the previous year's tally, primarily due to rising costs from employee investments and promotional activities. However, some losses were offset by pricing strategies and better store efficiencies.

End Notes

The Zacks Rank #3 (Hold) company, trading slightly below the restaurant industry's average, though it remains higher than broader sectors. The stock's impressive gain in the past three months, outpacing competitors is bolstered by strong technical indicators, as it trades above its 50 and 200-day moving averages. This momentum is attributed to the new CEO, Brian Niccol, whose focus on efficiency and customer engagement is expected to elevate operations.

Its product innovations, particularly in cold beverages, have driven traffic, but challenges remain, including margin pressure and slow recovery in China, affecting global comparable store sales. Despite these headwinds, Starbucks' reinvention plan and operational improvements offer potential, though margins remain under strain from rising costs.

For long-term investors confident in Starbucks' ability to overcome its current challenges and sustain growth, the stock may present a solid value opportunity. However, new investors might want to hold off until there are more evident signs of recovery, especially in the international market, before committing.

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