Why Is Starbucks Going Down?

Coffee chain Starbucks (NASDAQ:SBUX) has struggled quite a bit in a year marked by unusually high stock market returns.

Year-to-date, the stock has fallen more than 6% as flagging performance, high stock valuations and uncertainty about the future have taken their toll.

Let’s take a look at why Starbucks share price has been sliding and whether the company still has a chance to turn its share prices around.

Waning Performance and High Valuation

To some degree, SBUX stock became a victim of its own success. Even after the selloff that has occurred this year, the stock still trades at about 29.6 times forward earnings, 2.7x expected earnings growth and 2.9 times sales. By most metrics, Starbucks still looks to be overvalued unless it can deliver high levels of forward growth to justify its stock prices.

This high valuation made Starbucks investors particularly sensitive to the negative changes in the company’s performance that featured prominently in the Q4 and full-year report. For the fiscal year of 2024, Starbucks saw its comparable sales decline 2% and transaction volume decline 4%. Net earnings per share, meanwhile, declined 8% over the previous year to $3.31. Q4 saw these trends accelerate dramatically, with comparable sales dropping 7%, transactions dropping 8% and EPS dropping 25%.

Shareholders may also be concerned with the lack of forward guidance provided by management for the 2025 fiscal year. With a new CEO in place and a transition effort in progress, the company has declined to provide guidance for revenues or net income. While this may be a wise move for managing expectations, it has done little to reassure investors that 2025 will be the year the company begins to bounce back.

How Inflation Is Hurting Starbucks

Much of the difficulty Starbucks is having is a result of ongoing inflation that is straining consumer budgets. The company itself has acknowledged that customers are cutting back in response to inflation, a trend that primarily drove the drop in transaction volumes over the last year. Even more worrying is the fact that this trend may not be over yet. November’s CPI report showed inflation rose 0.3% to an annual rate of 2.7%. Though still not massive, this stubborn inflation on top of the price increases of the past few years could keep forcing consumers to reduce their spending.

Added on top of macroeconomic inflation is the problem of rising coffee prices that will likely put additional pressure on the chain. Due to bad weather and low harvests, the price of Arabica coffee beans has surged by 80% this year. As a result, Starbucks will be operating in a more costly coffee market going into 2025. Higher input costs could further drive down earnings, and it’s not clear that the company can pass the costs on to consumers without further eroding its customer base.

Questions About Turnaround Plans

Finally, investors may be losing confidence in Starbucks’ plan to turn its flagging business around. Earlier this year, the company brought former Chipotle CEO Brian Niccol in to spearhead its growth efforts. Niccol’s success at Chipotle enthused investors, leading to a surge in stock prices. So far, however, the chain’s performance hasn’t improved on Niccol’s watch. Costs associated with the turnaround efforts could also continue to put pressure on Starbucks’ earnings. With shares still trading at fairly high prices, there could be more room left to fall if the company can’t deliver on its return to growth.

It’s also not yet clear how much room Starbucks still has for growth in the North American market. In Q4, transactions in North American stores dropped 10%, even more than the company’s overall average. While Starbucks is pursuing international growth, especially in China, the softness of its business in its home market raises concerns about whether or not the fast-growing company has finally matured.

Is There Still a Bull Case for Starbucks?

Despite the negative turn in both performance and investor sentiment, there’s still a lot to like about Starbucks. The company’s brand is all but unassailable, and many of its problems are likely temporary. The Fed’s latest meeting reduced expectations for rate cuts in 2025, with only about a 0.5% decrease now being forecast for next year. A policy of slower interest rate cuts could help to tamp down persistent inflation, giving consumers some extra breathing room for indulgences like Starbucks. While the company will very likely face higher input costs next year due to coffee prices, commodities like coffee are notably cyclical and the price could come back down in future years.

Starbucks could also still be fairly attractive for income investors. With a 2.7% yield, SBUX shares offer more than double the current S&P 500 average dividend. Although the company has a short dividend history, management has shown itself to be fairly committed to returning cash to shareholders.

Starbucks: Buy, Sell or Hold?

Right now, Starbucks shares may be a better hold than a buy. The company is undoubtedly going through some difficult times, and the stock’s price is still high enough to create worries of further downside. In the long run, though, Starbucks is still a very strong business that can likely weather the current headwinds and eventually return to growth. The problem for investors is that it’s very difficult to say when that will happen, creating a risk of overpaying now for a stock that could take quite some time to recover.

Here, it’s worth acknowledging that many Wall Street analysts take a more bullish view of Starbucks. Nearly half of the analysts covering SBUX give it a buy rating, and the median target price of $109 would see the stock advance more than 20% over the coming 12 months. That said, the market has already expressed its skepticism about Starbucks this year, and growth could continue to be a challenge in 2025. Given the current uncertainties, a wait-and-see approach may be the best choice where Starbucks is concerned.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.