Maybe Starbucks Corporation‘s (NASDAQ:SBUX) big push in China will help arrest the year-long slide in SBUX stock. After all, something has to. This is getting ridiculous. The Starbucks stock chart notched an all-time high in October 2015 and ever since then it has been moving slowly downhill.
SBUX stock has had some rallies now and again, but the trend is not its friend. The 200-day moving average rolled over in the summer and it still hasn’t stopped bending lower.
After looking closely at the Starbucks stock chart, the market is worried that SBUX’s top line isn’t growing fast enough. It has been the story all year long.
In the second quarter, Starbucks missed analysts’ average revenue estimate and issued soft top-line guidance for the following quarter. When Q3 eventually rolled around, Starbucks stock came up well short of the Street’s same-store sales forecast.
Disappointing Comps for Starbucks Stock
Same-store sales are a critical retail metric. New stores will add to revenue, but they’re costly. That’s why once they’re built they need to show increasing revenue gains. When SBUX misses on same-store sales — also sometimes known as comparable-store sales — it’s a big deal.
Global same-store sales rose 4% in the last quarter, but the Street was looking for growth of 5.7%. That’s a big shortfall. The fact that Starbucks suffered lackluster growth in every geographical area added to any anxiety. Moreover, a group of analysts says Starbucks will see same-store sales growth of 4.9% in Q4.
The America’s generated a 4% increase vs. estimates for 6.2%, and China/Asia Pacific came to 3% against a 4.6% forecast. The Europe/Middle East/Africa region saw sales actually retreat 1% when they were supposed to go up by 2.8%.
The first priority is to kick start sales growth in the Americas. Indeed, the same-store sales performance was somewhat shocking given Starbucks’ history. The showing broke a streak of 25 consecutive quarters of growth of at least 5% in the Americas.
The proximate cause of the falloff was a change to its loyalty program. Management admittedly underestimated the impact that would have. As CEO Howard Schultz said at the time:
“With candor and humility, we acknowledge that in certain areas we did not execute as well as we could have in the U.S. in Q3. Had we done so, we certainly would’ve reported stronger U.S. comps.”
The light comps only confirmed what the market already believes about SBUX stock’s growth prospects. It also trimmed its full-year sales forecast slightly. It’s paying higher wages — which is a good thing investors typically don’t like — and hiking prices too. At the same time, the cost for coffee beans is on the rise.
That’s why SBUX designs in China are so important. If Starbucks has an ace in the hole for its next big wave of growth, it will come from that region. To that end, earlier this month it said it was doubling down on this bet.
Five years ago, SBUX had 400 stores in China. Today it has more than 2,300, and by 2021, it intends to have 5,000 stores. It makes sense when China is delivering the the strongest growth rate of any Starbucks region.
But it’s not without risk, and that’s surely weighing on the Starbucks stock chart too. Store expansion on that scale in the notoriously difficult business environment of China can’t be taken for granted. Sometimes big companies that have found success in China later changed their tune. See Yum! Brands, Inc. (NYSE:YUM).
SBUX stock has to be at least close to bottoming out; the problem is that it needs a catalyst to get it rising again. Until then, we could be looking at sideways trading at best.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
