Starbucks perks up on margin strength: Are new highs in sight?

Key Points

• Starbucks had a solid quarter but failed to meet consensus; other headwinds remain for the stock price action. 
• Growth is present and expected to continue but reduced due to sluggish comp store growth in critical regions. 
• As many reasons for the stock to rally, the chart tells a different tale with potential for new lows in the picture. 

Starbucks Corporation NASDAQ: SBUX share prices perked up after the FQ1 release and guidance, but new highs are not in sight. The results were mixed, weak relative to the analysts' consensus figures, but whisper numbers were expecting far worse, so the stock shot higher. The takeaway is that growth remains on the table, and the Triple-shot reinvention program is meeting success and driving value. Still, a significant headwind for this consumer discretionary business may hold back the price action in 2024. 

Starbucks had a solid quarter despite missing the consensus 

Starbucks had a solid quarter, producing top-line growth, margin expansion and improved earnings compared to last year. The problem is that $9.4 billion in revenue is 250 basis points short of the consensus due to weaker-than-expected comp sales. 

Comps are up, but only 5% globally, with the U.S. up 5% and international up 7%, including China. 

Revenue is up 7.9% year-over-year (YOY) on improving traffic averages. Traffic is up partly because of store count, which increased 1.4% for the quarter and is up 3% YOY. Loyalty and promotions are also in play, with U.S. membership up 13%. Evidence of the brand's strength lies in gift card sales, which topped $3.6 billion to set a record; Starbucks gift cards are the No. 2 seller in the category. 

The margin news is the most impressive and central to why the stock shot up by 5% in early trading. The operating margin expanded 140 basis points GAAP and 130 adjusted to leave GAAP earnings up 22% and adjusted by 20%. 

Guidance is the other reason why Starbucks shares popped in early trading. The company lowered its revenue target for the year, aligning the new high-end with the prior low-end of 10% but maintaining the earnings outlook. It puts the $4.10 consensus target into play, which assumes 15% growth. The target may be cautious, given the outlook for store count growth. Store growth accelerated by 10% YOY in Q1 and should remain strong all year. 

Analysts narrow outlook for SBUX: 15% upside is possible 

The analysts' response to Starbucks' Q1 results is mixed, with upward and downward price target revisions entering the picture. 

However, revisions are narrowing the range centered on a consensus $112 stock price and not lowering the consensus. That figure has been relatively steady since mid-to-late 2023, implying a 15% upside for the stock. Post-release revisions include reports from Wedbush, Citigroup Inc. NYSE: C, Barclays PLC NYSE: BCS and BTIG.

Dividends are among the reasons why analysts remain interested in the stock. The payment is worth 2.4% to investors, with the stock trading at a relatively high 23x in this year’s earnings outlook. The payment appears safe, and share repurchases compound it, but there are risks. 

The share repurchases barely cover share-based compensation and share issuance, reducing the count by only 1% YOY by the end of Q1, compounded by a troubled balance sheet carrying significant losses and a larger shareholder deficit. 

The technical outlook: Starbucks could hit a new low

For as many reasons as there are to think Starbucks' stock price could increase in 2024, the technical action disagrees. The market surged on the FQ1 result but quickly sold off to confirm significant resistance at the 150-day and 30-day EMAs. 

The candle forming aligns with the downtrend begun in 2021 and suggests that recent lows will be retested for support. The market may fall through the $90 range on its way down to $80 or lower. In that scenario, firm support may only be reached at the $70 level. If support confirms at the bottom of the existing trading range, a rebound may form later in the year.