Table of Contents

• 3. Starbucks (SBUX) — Investment Case

  • a. Headwinds abound

  • b. Fix Assortment

  • c. Progress with Fixing Issues

  • d. The Runway

  • e. Quantitative

    • Annual Financial Trends:

    • Balance Sheet:

  • f. Team

  • g. My Plans for this Stock

3. Starbucks (SBUX) — Investment Case

Starbucks is the latest world-class brand to lose its way. Its last several months of performance have been lackluster, faith in the new team is dwindling and sentiment is truly awful. Is this a value trap or a compelling opportunity to add exposure to a brand that will rediscover its groove? Here I’ll dissect what’s wrong with Starbucks, how they’re addressing the issues, the quantitative picture, the team and where it can go from here. I wouldn’t call this a “deep dive” (although it goes deeper than any other “deep dive” you’ll read on social media) but rather a condensed view of the overall investment case. Let’s begin.

a. Headwinds abound

Several headwinds culminated in a very ugly Starbucks print last quarter. As we’ve recently covered, earnings growth estimates were cut from nearly 20% to roughly 0%. Revenue growth rate assumptions were slashed from about 8% Y/Y to about 2% Y/Y, while comparable store sales growth was cut from about 5% to 1%-2% for the year. That is an abnormally large batch of revisions for a rock-solid brand like this one. So what happened?

First, Starbucks did a poor job of evolving with the macro cycle. The team will tell you that messaging on value, especially to its occasional consumers, was lacking. Its passionate customers have still been consuming, but their more fringe customers have become more price sensitive and pulled back. Starbucks simply has not done well enough to cater to their needs. It must get proactive and effective at “communicating value to its customers,” especially as macro anxiety builds around the globe. The team will tell you exactly that. This hurt comp sales in the USA and across other markets as well.

There’s another internal blunder leading to financial choppiness. Starbucks is struggling with store-level throughput and meeting peak demand in the U.S.. It's seeing customers order, then cancel those orders before paying as they take too long to prep. 

This not only wastes labor, but also leads to raw material deadweight loss, lower ordering frequency and angry customers. Furthermore, Starbucks has recently struggled with inventory for its highly popular food items where supply chain delays led to lack of availability across a large number of stores. This isn’t a matter of fans of Starbucks abandoning the chain. Starbucks has made itself inconvenient. Consumers are trying to give them their money and are being chased away by frustrating delays. That is fixable.

Macro weakness and perhaps some geopolitical tensions are weighing on its Middle East segment as well. In China, a slower than expected recovery and surprisingly intense pricing competition amplified the weakness for the overall company. When you rely on China for more growth, you expose yourself to all of the risks that come with that country. There doesn’t appear to be geopolitical-related blowback here (we’ll cover brand affinity later), but Chinese macro weakness impacts discretionary purchases the same as it does in the U.S..

Finally, relatively elevated coffee commodity prices are having a material impact on its bottom line and its ability to affordably deliver value to its occasional consumers. As you can see, commodity prices are not favorable at the moment.

b. Fix Assortment

Finally, assortment is the last issue to cover. This is a key risk for Starbucks as its menu does need to evolve a bit and there’s no guarantee of that working. From Dutch Bros to Celsius, it’s clear that consumers want broader options to consume caffeine. Starbucks needs to cater to that reality. Whether it’s the new sugar-free, low calorie energy drinks, plant-based offerings, the lavender matcha, an updated line of sandwiches, muffins etc. the menu needs refreshing and these changes need to resonate. Starbucks recognizes the obligation to evolve and is planning to add 5 sugar-free customization options to its menu, likely in response to strong demand for things like stevia leaf extract and monk fruit sweeteners. That’s what GenZ wants… give them what they want. Some of the new offerings have worked early on, while others haven’t. Meanwhile, the team has gathered a great deal of feedback and is gearing up to re-launch several products.

Candidly, I also think its coffee is occasionally burnt and sometimes tastes bad. Especially in airports – it’s usually fine in normal stores and always great at the reserve locations. An important caveat here is that I drink black coffee, and most people who go to Starbucks don’t. Sugar has a way of masking bad taste. Still, bad black coffee doesn’t work for a coffee company, and I know that I’m not alone. The Siren Craft System and its implementation of the new Clover Vertica maker should help here.

c. Progress with Fixing Issues

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