Starbucks ' (NASDAQ: SBUX) shareholders are hoping that a double shot of caffeine can boost the company's prospects. Investors aren't happy with the latest challenges. Shares have been a huge disappointment, down 20% in the past five years and off 39% from their July 2021 peak.
Maybe Starbucks can turn things around and produce solid returns going forward. Where will this top restaurant stock be in three years?
Starbucks' business is struggling
Starbucks just provided a financial update for its fiscal 2024 third quarter (ended June 30), and the results weren't encouraging. Revenue of $9.1 billion represented a 1% year-over-year decline. This was driven by 2% and 7% same-store sales dips, respectively, in the U.S. and internationally. The company's main challenge has been declining foot traffic at its locations, which is something no restaurant chain wants to see.
There have been complaints from customers that their orders take way too long to be fulfilled. But management highlighted improvements in this regard on the latest conference call. People might also be exhibiting more selectivity in how they spend their money in the inflationary environment, which can negatively affect discretionary purchases.
With weaker sales trends comes a hit to profitability. Starbucks' Q3 operating margin of 16.7% contracted from Q3 2023, thanks to higher promotional activity and increased costs for labor.
For the full fiscal year, the executive team maintained guidance. They expect low-single-digit revenue growth, with earnings per share to be flat to up low single digits.
Positive attributes
It's easy to get caught up in the latest financial results, especially when they're disappointing. Another cause for concern is Starbucks' declining share price at a time when the broad market indices have put up solid returns in 2024. However, it's best to focus on Starbucks' positive attributes.
This remains a financially sound enterprise. Starbucks is consistently profitable, raking in billions of free cash flow every year. Consistent bottom-line performance helps fund the dividend, which yields a healthy 3% right now.
Starbucks deserves credit for being an industry trailblazer when it comes to integrating technology in its operations. There are very few, if any, loyalty programs that can match this one. The mobile app gives Starbucks an invaluable channel to boost accessibility and convenience, deploy marketing campaigns, and collect data.
Starbucks currently has 33.8 million 90-day rewards members in the U.S. who order more frequently and spend more than non-member customers. In China, there were 22 million active loyalty members at the end of last quarter.
Last but not least, we can't forget that Starbucks possesses one of the strongest brands in the world. This has allowed the business to sell a commoditized product like coffee as a premium item. While the industry is competitive, Starbucks has remained relevant for a very long time due to the brand.
Is it time to buy Starbucks stock?
The market has become very pessimistic about Starbucks. There's good reason for this, as the business continues to struggle. However, this might present a lucrative buying opportunity for investors who are able to think independently, while at the same time practice immense amounts of patience.
The shares trade at a price-to-sales ratio of 2.4. This is about as cheap as the stock has sold for in the past decade, so the current valuation is compelling.
Given all the positive attributes discussed above, I believe Starbucks deserves the benefit of the doubt here. The current macro environment is something all businesses are dealing with, particularly retail-based operations. Starbucks has stood the test of time, and I believe the stock can perform well over the next three years, provided that management can get the company back to posting strong revenue and profit growth.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy .
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