Investors are wary of many headwinds facing Starbucks ahead of its earnings report on Tuesday. A potential new summer drink with fruit flavored pearls — similar to bubble tea — could bring some fresh momentum to the coffee chain.
For Starbucks’ second fiscal quarter ended in March, analysts polled by FactSet expect the coffee chain to post 80 cents per-share earnings and $9.1 billion in sales, marking 8.1% and 4.6% growth, respectively, from the same quarter a year ago.
The company missed first-quarter earnings expectations and lowered its revenue guidance for the rest of the fiscal year. Management expects sales to grow between 7% and 10% year-over-year in 2024, down from the previous forecast of 10% to 12%.
Pressure from inflation will continue in 2024, especially as California boosted the minimum wage for fast-food workers from $16 to $20 per hour. According to data from Gordon Haskett, Starbucks raised prices in the state by 7.8% between Feb. 15 and April 15, one of the largest hikes among peers. That could lead to declining foot traffic at its stores.
Last year, Starbucks came under heat for its response to the Israel-Hamas war, prompting boycott calls that not only dented sales in the Middle East, but also foot traffic in its U.S. stores, especially among customers who pop in occasionally for afternoon treats. It remains to be seen whether the boycott impact continued in the March quarter as well.
The coffee giant is also facing challenges in China, its second-largest market behind the U.S. Economic recovery was slower than expected in the country, while lower-cost local competitors like Luckin Coffee have been gaining share.
Starbucks’ ongoing struggle with its union also could bring more uncertainty. Employees at 4% of its U.S. stores have chosen to unionize, and some of them went on a strike last November. Starbucks said it would resume contract talks with the union in late April, and expects the negotiations to continue throughout the year.
Over the past 12 months, Starbucks stock has declined 23% and now trades at 20 times forward earnings, the lowest since June 2018.
Still, there are things at Starbucks to be upbeat about, including improving operating margin and a strong loyalty program that added 13% active members last year.
Starbucks’ coming summer drink lineup could be another catalyst for U.S. sales. There has been chatter that the new products might include a raspberry-flavored refresher with chewy balls, often referred as “pearls” or “boba,” according to Stifel analyst Chris O’Cull.
“We are encouraged to see that the company may leverage a popular consumer trend, especially amongst younger consumers,” wrote O’Cull in a recent note, “We hope to learn more about the potential rollout on the upcoming earnings call.”