Starbucks (NASDAQ:SBUX) has seen its stock slide 21% since the beginning of the year, even as founder Howard Schultz announced that he is returning to helm the company. Should you buy the dip?
While the total market suffered in the early stages of 2022, the decline at Starbucks has outpaced many of its quick-serve restaurant peers. Shares of YUM (YUM) have dropped 14% and McDonald’s (MCD) has fallen 7%. Shares of Restaurant Brands International (QSR), which owns rival coffee-chain Tim Hortons, have slipped 3%. In comparison, the S&P 500 Index has fallen 4%.
Like many of its peers, Starbucks has had to grapple with a wide range of pandemic and macroeconomic issues over the past several months. These headwinds include rising labor costs and supply chain problems that will likely lead to higher prices.
At the same time, Starbucks has also seen sales weaken in China, a major market for the company, due in part to pandemic-related restrictions and increased competition from chains such as China’s Luckin Coffee (OTCPK:LKNCY).
Founder returns to the helm
On March 16, the company announced that founder and former CEO Howard Schultz will return as interim CEO amid an employee push to unionize, and increasing costs. He will succeed Kevin Johnson, who is retiring from the company on April 4.
News of Schultz’s return was generally well-received by analysts.
"The range of outcomes from this process is vast, but we view as a positive for a stock that has been under pressure YTD. We note a strong internal bench but believe unionization publicity could be a factor pushing the company to look externally,” wrote Cowen analysts, who gave the stock an Outperform rating.
“This transition comes at a time of heightened near-term uncertainty surrounding financial performance, in the context of recently lowered earnings forecasts for the business amidst labor challenges, Covid impacts, supply chain inflation, and ongoing business disruptions in China,” wrote Morgan Stanley analysts, who rated the stock Equal Weight.
Despite the challenges, Morgan Stanley added: "These comments non-withstanding, SBUX has a deep bench of talented executives and has endured management turnover in several key roles in the past."
Unionization gaining traction
As another issue facing the firm's returning CEO, unionization continues to gain traction with Starbucks workers. The latest headlines include a Seattle Starbucks becoming the latest to vote in favor of union representation.
The unionization push began last year, following a pro-union vote by workers at a Buffalo, N.Y., store. Since then, about 150 stores have petitioned to unionize, with seven voting in favor. The company has around 9,000 stores in the US, according to the Wall Street Journal.
Despite ongoing labor issues, Starbucks is moving forward with its grand expansion plan. The company revealed at its annual meeting this month that it intends to have around 55,000 company-operated and licensed stores across 100 markets by 2030, which would make it the largest quick-serve restaurant chain in the world.
Is SBUX a Buy?
Given the labor and sales uncertainty, can Schultz's return spark a sustained recovery in the firm's stock?
Wall Street analysts, on average, are bullish on the stock, rating it a Buy. Of the 34 analysts covered by Seeking Alpha over the past 90 days, 12 rated Starbucks a Strong Buy, six a Buy, 16 a Hold and none a sell. SA authors also rate the stock a buy, on average.
SA’s Quant Ratings for Starbucks view the stock as a Hold. While the company earned an A+ for profitability, it received a C+ for momentum, C- for growth and a D+ for valuation.
Jefferies analysts said in a note dated March 23 that they think the Starbucks' selloff has been overdone and rated the stock a Buy with a price target of $130.
“We view the recent pullback as an overreaction to a confluence of events that are not long-term fundamental drivers to the business,” wrote the analysts. "We believe the current price provides an excellent entry point in a high-quality large-cap growth company.”
For a more in-depth look at Starbucks, check out SA contributor Khen Elazar’s “Starbucks is Getting Closer to an Attractive Price” or SA contributor Moonshot Equity Analysis’s "Starbucks Corp: A Stable Stock Great For Long Plays".
