The bull market rages on, and Starbucks Corporation (NASDAQ:SBUX) stock continues to travel sideways.
For the past two-and-a-half years, SBUX stock has done nothing but bounce between the mid-$50’s and mid-$60’s. That trend isn’t changing anytime soon. After a tax-reform-inspired run put SBUX stock at the high end of that multiyear trading range, a bad first quarter earnings report has sent shares tumbling back to the middle of that trading range.
The sideways run continues.
What’s happening under the hood? For several years, Starbucks growth has been slowing because the dominant coffee house operator has been subject to increasing competition on all fronts. Its direct competitor, Dunkin Brands Group Inc (NASDAQ:DNKN), has significantly upped its price value game and is aggressively expanding westward, adding pricing and geographic pressure to Starbucks.
Meanwhile, traditional fast-casual brands like McDonald’s Corporation (NYSE:MCD) are jumping aggressively into the coffee game by launching things like All Day Breakfast, which offers exceptionally low prices on breakfast foods and beverages.
And then there are all the indie coffee shops popping up left and right, which are winning by painting themselves as the trendier option versus corporate Starbucks.
Put it all together, and growth at Starbucks is slowing to multiyear lows. So long as this growth slowdown persists, SBUX stock will remain stuck in neutral.
The Numbers Aren’t Good for SBUX Stock
The numbers across the board haven’t been good at Starbucks. And they are only getting worse.
Global comps limped in at 2%. For perspective, this used to be a 5%-plus comparable sales growth company. For many years, SBUX comps never fell below 5%. That was the gold standard.
When they fell below 5% last year, everyone freaked out. Management reset expectations, and said that comps would fall in the 3%-5% range into the foreseeable future.
But now they are coming in at 2%.
That’s not good. But whats worse is that global transaction growth is flat, meaning more customers aren’t going to their stores. The only growth SBUX is seeing is from consumers throwing food into their orders.
That is particularly negative because transaction growth was starting to improve after going negative last year. Indeed, transaction growth peaked into positive territory by the end of last year, implying that growth was back on track.
But its not. SBUX is reporting flat traffic against a negative lap, so traffic is actually down a 2-year basis.
This ugly growth slowdown is happening everywhere. The Americas comp limped in at 2%, the worst in over seven plus years. Transaction growth was flat on a negative lap. Europe, the Middle East and Africa comps fell 1%, with transaction growth down an astounding 4% (worst in 7-plus years). Again, that negative transaction growth had a negative lap, so traffic in EMEA is down big on 2-year basis.
And while bulls want to talk about how big the China opportunity is (comps were up 6% in the quarter and the new Shanghai Roastery apparently makes more than double what a traditional U.S. store makes in an average week), even the booming China market wasn’t enough to offset slowing growth everywhere else in Asia. The China and Asia Pacific region, which reported comp growth of 22% in 2011, saw comps limp up just 1% in the quarter.
In sum, growth is slowing everywhere. And this isn’t a one quarter anomaly. Its a multi-quarter trend, implying that this era of slow growth is here to stay.
Meanwhile, margins are pulling back.
Put it all together, and its just not a pretty story at SBUX right now.
Bottom Line on SBUX Stock
SBUX stock still isn’t worth buying after this sell-off.
Comps are now expected to fall at the low end of management’s 3%-5% guide. Revenue growth is expected to be somewhere around 10%. Earnings are expected to be roughly $2.50 thanks to the tax reform benefit.
Over the next several years, comps will stay consistently below 3% thanks to growing competition. Margins will be under pressure thanks to pricing pressure from competitors. The company will be able to buy back shares and help drive earnings growth, but still, we are only looking at something like 10% growth per year.
The S&P 500 is also expected to grow earnings by 10% in 2019. But it’s trading at under 19-times 2018 earnings estimates whereas SBUX stock is trading at over 23-times 2018 earnings.
That discrepancy doesn’t make me a comfortable buyer of SBUX stock at these levels.
Consequently, I think SBUX stock stays range-bound over the next several months. The sideways run will continue.
As of this writing, Luke Lango was long MCD and DNKN.
