Starbucks Stock: Culture Fix May Be Key to Long-Term Growth

Key Points

• Starbucks shares are up 11% since Q2 earnings, even as EPS declines and analysts downgrade the stock.
• CEO Brian Niccol's strategy focuses on reviving Starbucks' "third place" identity and addressing internal cultural issues.
• Starbucks eyes market share gains in China through discounts, but margin pressure remains a concern.

Starbucks Corp. NASDAQ: SBUX is at the beginning of a high-stakes turnaround under new chief executive officer (CEO) Brian Niccol. However, while SBUX stock is up 11% since April and may offer long-term value if the turnaround takes root, financial and cultural headwinds may limit the stock gains in the short term.

Niccol acknowledged the time required for the company’s turnaround in its second quarter earnings report in April. At that time, Starbucks didn’t issue annual guidance. Niccol also remarked that earnings per share (EPS) “shouldn’t be used as a measure of our success.”

Nevertheless, investors seem to be giving Niccol the benefit of the doubt. SBUX stock has been up about 11% since the report. But it’s hard to say if those gains are due to the company’s vision or just a part of the broader market rally.

Where Will the Growth Come From?

Many investors are asking that question. In its most recent earnings report, the company posted 8.8% year-over-year (YOY) revenue growth, reversing a trend of three straight quarters of YOY revenue declines.

However, revenue is still below analysts’ forecasts. Plus, the company’s comparable store sales were still down year over year despite a slight uptick in China, the company’s second-largest market.

The news is worse on the bottom line where the company’s earnings per share (EPS) continue to move lower YOY.

For now, the company hopes that China can be a significant area of growth. According to Bloomberg, Starbucks is planning sharp discounts of, on average, 70 cents on tea sales in China. This could help the company gain market share, but it will come at the expense of margins.

Changing Culture Takes Time

Starbucks has lost its first-mover advantage. It now operates in a highly competitive sector with more nimble competitors, revealing that what was once the company’s biggest strength, its culture, is now a key weakness.

Starbucks used to be the anti-establishment company. For better or worse, it’s now perceived as the establishment. The company has made headlines in the last five years as its baristas and store employees fight for union representation. Among the grievances are poor working conditions, unpredictable scheduling, and understaffing.

By fighting back against these efforts, Starbucks management has only added to the perception that it's gone far from its history as a company where employees were “partners.”

However, the issue of culture is more than just an internal battle. Starbucks is fighting to maintain its image with consumers, some of whom believe the union battles go against its progressive image, while others see the brand as being too progressive.

That’s why a key element of Niccol’s “Back to Starbucks” turnaround plan involves returning the company to its roots as a “third place” between home and work. According to Niccol, part of that plan involves balancing the company’s dominant mobile business with a heightened focus on making Starbucks a cool place to hang out again.

This may be the right battle, but as any professional sports fan knows, changing a culture takes time. However, after the turnover at the CEO position in the past few years, the hiring of Niccol seems to be a good first step.

Finding Value in SBUX Stock Requires a Long-Term View

It's hard to argue that SBUX stock has been a better trade than an investment over the past five years. What the stock has lacked in consistent growth and strong returns among consumer discretionary stocks, it’s made up for with momentum opportunities for swing traders.

In the near term, that may continue to be true. At least two analysts, Goldman Sachs Group Inc. NYSE: GS and Cowen, have downgraded SBUX stock since the company’s earnings report.

Marketing solutions like changing the culture may not satisfy stock technicians or fundamental investors, but changing the culture is at the root of Starbucks's larger problems.

Reducing prices and possibly increasing market share in China would be beneficial, but it will only go so far if Starbucks can’t reclaim the power of its brand.

However, the Niccol effect will keep the stock above the $70 range it hit in 2024. If that’s the case, starting a position in SBUX today could lead to strong growth over time. With SBUX stock trading near 30x forward earnings, below its five-year average, the stock may offer long-term upside for patient investors.

But until there’s more clarity around the cultural and financial issues, the stock is better suited for gradual accumulation rather than aggressive entry.