Starbucks Needs to Turn Things Around, Fast

There's no way around it, Starbucks (NASDAQ: SBUX) had a rough second quarter. The large coffee chain simply isn't resonating as well with customers right now. While there are a number of reasons why this could be happening, investors should be paying extra close attention to sales and, more to the point, same-store sales, right now. Here's why.

What went wrong at Starbucks

Starbucks hasn't suddenly seen a dearth of customers. In fact, it generated $8.6 billion in sales in the second quarter of 2024, showing that it remains a premier restaurant chain for coffee lovers. That translated into adjusted earnings of $0.68 per share. But that figure was down 8% from the same quarter a year ago. So there's something going on here that investors need to get their heads around.

Image source: Getty Images.

One of the biggest issues is same-store sales, which declined 4%. Same-store sales looks at the performance of locations that have been open for at least a year. It is basically an indication of how well the company's core business is doing. If same-store sales are rising the concept continues to resonate with consumers. If same-store sales are falling, well, it could spell trouble because customers aren't returning like they used to.

Right now, Starbucks' customers are pulling back. Notably, transactions were down 6%, with price increases of 2% offsetting the full hit and leaving same store sales at down 4%. There are many reasons why this could be happening, from customers balking at price increases to cost-conscious consumers simply shifting to less costly coffee more generally. After all, Starbucks is, basically, selling a luxury food item that can often be found free in offices or for less money elsewhere (or at home).

A second-order negative at Starbucks

But here's the thing that's extra troublesome with Starbucks today: It opened 364 new locations in the second quarter. New locations bring in material amounts of revenue and can often cover weak same-store sales performance. That's why same-store sales fell 4% but overall sales were only off 2%. However, it appears that Starbucks is at a point where the performance of its existing stores is notably more impactful than new stores.

It's probably not reasonable to expect a large chain like Starbucks to post huge same-store sales figures. Low single digits is good enough, noting that McDonald's bragged about achieving three years worth of "nearly 2%" same-store sales growth when it reported first-quarter results. (The streak ended in the second quarter, when same-store sales fell 1%.) Still, the combination of new stores and weak same-store sales at Starbucks is a troubling sign, and management needs to start working harder to turn the core business trends around.

SBUX data by YCharts

To be fair, Starbucks' same-store sales increased 5% in the first quarter. And one weak quarter doesn't make a trend. So investors shouldn't think that the house is on fire here. But if you own Starbucks you should be paying extra close attention to the stock right now. If the third quarter comes in weak, that could, indeed, be the start of a trend.

Starbucks isn't going anywhere

Starbucks is a well-established coffee chain; it is highly unlikely that the company will suddenly go out of business. But the stock has been performing very weakly for a while and the ugly same-store sales figures in the second quarter won't help investor perceptions. And even though the stock looks historically cheap given that its price-to-earnings ratio is currently around half of its five-year average, if same-store sales turn negative and stay there, there's a good chance that the stock could get even cheaper.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy .