Starbucks: Downtrend Signals, Anticipates New Bottoms

Starbucks (NASDAQ: SBUX) experiences a downturn, mirroring broader consumer trends. Recent performances from McDonald’s (NYSE: MCD) and Kraft Heinz (NASDAQ: KHC) in the fast food and consumer staple sectors indicate a weakening consumer base. Starbucks’ disappointing results not only echo this sentiment but also prompt a downward revision of its full-year projections, hinting at a larger systemic issue.

Consumer Contraction Concerns: Starbucks at the Forefront

While Starbucks might be the standout with significant contraction this quarter, the question lingers: who will follow suit? With ongoing economic policies promoting sustained inflation and potential interest rate adjustments, consumer spending faces continued strain. As evidenced by the trimming of luxuries like lattes from household budgets in Q1, it's evident that discretionary spending is under scrutiny. The looming question remains: which business sector will bear the brunt next?

Starbucks' Struggle and Slowing Demand

In Q1, Starbucks faced substantial challenges across its segments and global markets. While a slight dip in performance was expected, the $8.56 billion in revenue fell short by 1.8% compared to the previous year, missing consensus estimates by 650 basis points. Globally, comparable store sales (comps) declined by 4%, offset slightly by a 3% increase in store count, with 364 new stores added during the quarter.

The decline in comps can be attributed to a 6% drop in foot traffic, offset by a 2% rise in the average transaction value driven by price increases. Notably, the US market, Starbucks’ largest segment, witnessed a 3% decrease in comps, while international markets experienced a 6% decline. Particularly concerning is China, the second-largest market, which saw an 11% drop, constituting 18% of the company's net revenue.

Margin Pressures and Bleak Outlook

The news on margins is equally grim, with triple-digit basis point declines in both GAAP and adjusted operating margins, resulting in adjusted and GAAP earnings of $0.68, falling short of expectations by $0.12 and marking an 8% decline. This decline, more than quadrupling the revenue contraction, exacerbates the company's challenges.

The outlook provided by Starbucks further dampens investor sentiment, with downward revisions across revenue, comp store growth, store count growth, and margins. Anticipated revenue growth in the low single digits falls significantly short of initial projections, with US comps expected to hover around 1% and margins remaining stagnant rather than improving. Consequently, the overall outlook for the year appears bleak, with anticipated downward revisions likely to impact the broader market outlook for S&P 500 earnings and market support.

Analysts Reassess Starbucks' Prospects: A Value Proposition?

Despite the consensus Hold rating from analysts, with an average projected upside of 40%, post-release activities indicate a different sentiment. Several downgrades and price target reductions have been noted, with no instances of target increases. While revised targets suggest an upside potential, it is notably less than the initial 40% projection. However, the current trading position below the lower end of the range indicates a potential deep-value opportunity. The pertinent question remains: how far will the stock decline, and when can investors expect a rebound?

Technical Analysis and Market Prospects

From a technical standpoint, the outlook appears bearish, characterized by a gap and a significant downturn in stock value. While the market may experience temporary rebounds from the day's lows, support levels around $70, coupled with the resilience shown at the 2022 lows, may prevent further declines. However, failure to hold at these levels could see the stock plummet to pandemic-era lows near $56. In the event of a market recovery, resistance levels are expected near $80 to $82, with multiple barriers potentially capping upward movements until the $110 threshold. ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered as investment advice.?