Why Starbucks Might Continue to Struggle in the Bear Market

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Some stocks seem like good investments to hang on to in times of downturn and inflation. Starbucks (SBUX -0.34%) doesn’t strike me as one of those stocks. Since the start of the year, it has fallen by 27%, which turns out to be a worse buy than the S&P500which is only down 13%.

But as bad as things have been for the company, I wouldn’t be surprised if they got any worse. Here’s why it might be a bad stock to hold in this tough market.

Its growth rate is slowing

Starbucks released its third quarter numbers earlier this month, for the period ended July 3; sales rose a modest 9% year over year to $8.2 billion. What’s particularly telling is that global same-store sales increased 3%, primarily due to a higher average ticket (which increased 6% while same-store transactions decreased 3%) . Starbucks has raised prices several times since October due to rising inflation.

A quarter earlier, the company’s sales were up 15% and comparable transactions 3%. Although China’s third-quarter comparable numbers were down significantly due to lockdowns (sales were down 44% on a comparable basis) and weighed on Starbucks’ numbers, even in North America, comparable transactions n increased again by only 1% this quarter against 5% a period earlier. .

The danger for Starbucks is that slowing demand, and therefore revenue, isn’t its only problem.

Costs are accelerating and could increase

Modest sales growth might be acceptable to investors if the company’s costs tighten, but that is not the case. In the last quarter, operating expenses increased by 13% but revenues by only 9%. The result was that Starbucks’ net income fell 21% to $912.9 million.

Higher supply costs due to inflation could make the problem worse, as could the threat of more unionization of its stores. In December, a Starbucks store in Buffalo, New York, became the first in the chain to unionize. Since then, more than 200 stores have voted in favor.

Putting more pressure on its spending could mean even slimmer profits for Starbucks. And that makes the earnings multiple of the stock even harder to justify.

Stocks are trading at a steep premium

Even with its value falling this year, Starbucks stock is trading at 25 times its future earnings. By comparison, investors pay 18 times future earnings for the average S&P 500 stock. High multiples may be justifiable for companies that grow at high rates, but that’s not the case for Starbucks these days. this. Its earnings face significant headwinds from the potential for slower revenue growth and rising costs.

These headwinds may not last in the long term, and as inflation declines, activity may return to normal. However, the effects of unionization could lead to costs that will remain with the company in the long term. And it’s still too early to tell what impact this will have on the bottom line, as organizing efforts are still relatively new. Starbucks has over 15,000 stores in the United States, so many more sites may unionize.

Starbucks has become a risky buy

The strength of the Starbucks brand is currently being tested. Sales growth is slowing, and if the numbers continue to fall, it could be a sign that consumers aren’t taking the price increases in stride. Given the record inflation numbers in the economy right now, I’m not optimistic that Starbucks will be able to keep prices high while ensuring that sales don’t end up going down.

Starbucks’ high valuation only seals the deal: it’s a growth stock that seems too risky to own right now.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Starbucks. The Motley Fool recommends the following options: Short Calls October 2022 at $85 on Starbucks. The Motley Fool has a disclosure policy.

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