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Starbucks looks like a shell of its former glory: Morning Brief

Brian Sozzi · Executive Editor
6 min read

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"Fixable, but it will take time," a Starbucks (SBUX) insider with knowledge of the company's many troubles recently told me.

The comment left an impression, especially in the wake of Starbucks' earnings results this past week.

Shares of Starbucks popped briefly following a quarter that could only be described as abysmal:

  • 6% transaction drop in North America.

  • International comparable sales tanked 7%.

  • Comparable store sales in China plunged 14%.

  • Non-GAAP operating profit margins fell to 16.7% from 17.4% a year ago.

The market response was befuddling, and likely stemmed from management hyping up a few green shoots in the business on the earnings call (though, to be fair, cold espresso sales were up a sizzling 4%...) — or what they perceive as green shoots.

The Street — having been burned by Starbucks for most of the past two years (the stock is down 9% versus a 35% gain for the S&P 500 during that stretch) — largely didn't buy in.

"Macro, boycotts, pricing resistance, or in-store operations are the root cause of the North America slowdown? We have not found a unique answer to this question yet, suggesting that all (or none?) of the reasons above are causing the pullback in North America. While Starbucks points to transitory nature of the challenges, we believe that some structural (yet not insurmountable) demand headwinds are also playing a role (e.g., store saturation, increased competition, fading appeal to younger and occasional consumers and declining store experiences)," Bernstein restaurant analyst Danilo Gargiulo said in a client note.

The bigger picture: The one-time iconic company and growth stock has tanked 21% in the past five years, according to Yahoo Finance data.

And this venti-sized black eye isn't out of the blue. Consider what we've seen from Starbucks over the last 12 months.

Howard Schultz — a meddling billionaire founder turned failed presidential candidate — not so covertly ripped his hand-picked successor Laxman Narasimhan in a LinkedIn post, all but undermining his authority.

Talk about a kick in the butt for a new CEO who trained in stores for months with Schultz before officially taking over. Narasimhan is also an accomplished C-suite executive with a successful track record.

But also a reminder on how Schultz just can't seem to relinquish the limelight and the ingrained desire to lurk over the company like a hungry aging lion.

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