They say a picture is worth a thousand words. The truthfulness of that premise largely depends on the picture, but the point is well-taken all the same. Sometimes, important details can’t be expressed with mere words. Only an image can tell the tale. To that end, three pictures below tell a lot about the recent chapters of Starbucks (NASDAQ:SBUX). Spoiler alert: Fans and followers (and owners) of SBUX stock aren’t going to be pleased.
The following charts illustrate the symptoms of many of the problems the coffee house chain has struggled to deal with of late … challenges yours truly here laid out just a few days ago.
SBUX Stock and Shrinking Margins
No one can deny Starbucks stock has been a growth machine. Revenue has grown every year since 2009, in step with new-store additions whether they were needed or not. Net income has grown too. Ditto for earnings-per-share of SBUX stock, which have grown from 70 cents in 2010 to $3.05-per-share now.
It’s all as it should be.
If one takes a closer look at the bottom line though, you’ll find profit margins have been slowly but surely shrinking. Not a lot, but enough to cause concern.
One or two quarters of diminished profitability isn’t the end of the world. Sometimes you have to spend a little money now to make more money later. That’s not what owners of Starbucks stock have been seeing though. While most companies tend to become more profitable the bigger they get, greater size has actually worked against this particular organization.
It’s a clear sign that an operation can become too big, and too complex, to successfully manage.
Yes, analysts expect margins to improve going forward, reversing the trends underway right now. Those analysts have yet to clarify exactly how the shrinking margin trend might get turned around though.
China Isn’t ‘Crushing It’
Just a few years ago, a deeper foray into China was hailed as a major growth engine for Starbucks. And to be clear, the company has seen increased success there.
To be equally clear, however, even strong growth in China was never going to translate into huge overall growth, as China’s contribution to the top line is still only about 15% of its total revenue.
And perhaps worse, the Asian market isn’t adding much more to the bottom line. The market has just proven relatively tough, and not all that cheap, to operate in. Europe and the Middle East, meanwhile, have helped even less … not that the all-important U.S. market has proven heroic in terms of profits despite some sales growth.
SBUX Analysts Told You So
Last but not least, analysts haven’t been, and still aren’t, fans of Starbucks stock.
It’s a situation that incites the “chicken or the egg” argument. Are analysts barely lukewarm on SBUX stock because they’ve got no reason to think it will rise? Or, are Starbucks shares not rising because analysts remain lukewarm on it.
Whichever it is (and maybe it’s a little bit of both), analysts are increasingly pessimistic on the company. Even the recent injection of a couple of new executives barely moved the opinion needle in a bullish direction.
Bottom Line for Starbucks Stock
Nothing is beyond repair. All fiscal trends can reverse course, for better or worse.
The three images you just saw, however, make it difficult to say the doubters and critics aren’t seeing the bigger picture, or are choosing to not see the company’s successes. With the global economy just now getting consumers over a big psychological hurdle that allows them to splurge a little more than they have been, SBUX should be doing better than ever. If anything, it has been doing gradually worse as the economy has improved and spending has grown.
It’ll be interesting to see, or even if, the company regroups.
One thing is for sure in this case though … the pictures say a mouthful.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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