Starbucks (SBUX.US) will report its Q3 earnings on Thursday, and investors are bracing for another tough quarter as the coffee chain continues to be weighed down by sluggish traffic, heavy promotions, rising wages and input costs, which are all weighing on margins.
In Q2, Starbucks saw same-store sales down 4%, traffic down 6%, and profits and sales were also hit, which CEO Laxman Narasimham called "a challenging environment." The results surprised investors, and the stock fell 18% the next day, to $80.
After the "bombshell" Q2 earnings, Starbucks founder Howard Schultz called on the company to "acknowledge mistakes" and "go crazy on customer experience."
Aggressive investor Elliott Management used the stock price decline to disclose its "significant" stake in the company. Elliott Management is likely to seek board seats and push for leadership changes.
Hedgeye Risk Management said: "We have no confidence that the current management team has the ability or the will to take drastic measures to save this sinking ship." The firm added that "Starbucks' operational chaos is out of control, and the path to recovery looks both dangerous and long."
Comments from Starbucks CFO Rachel Ruggeri may foreshadow another challenging quarter. Ruggeri acknowledged that the company's relationship with customers has "deteriorated," and "we expect these headwinds to persist into Q2, but they are lasting even longer than we anticipated." CEO Narasimham echoed the same sentiment, meaning prepare for another tough quarter.
Seeking Alpha data shows that analysts have downgraded earnings expectations 28 times for Starbucks in FY2024 and EPS expectations 31 times, with no upward revisions. The market broadly expects Q3 revenue growth of less than 1% to $925m, EPS of $0.93, down 7%.
Looking ahead to Thursday, Wall Street will focus on Starbucks' guidance. In Q2, the company admitted sales were below expectations and revised its global revenue growth outlook from 7%-10% to low single digits. Same-store sales growth is also expected to remain in the low single digits, down from 4%-6% previously. Starbucks also expects margin to remain flat, down from "gradual expansion" previously.