Investing.com – Analysts at Redburn Atlantic have downgraded Starbucks (NASDAQ:) to a “Sell,” arguing that the consensus outlook for the coffee chain does not “adequately reflect” the costs associated with the company’s extensive turnaround plans. the company.
In October, Starbucks suspended its outlook until the next fiscal year as new CEO Brian Niccol works to revamp the company amid falling demand for its higher-priced offerings.
Same-store sales, net income and revenue all declined in the fourth quarter ended Sept. 29.
“Starbucks has not increased weekly visits on its US system since 2016,” say Redburn Atlantic analysts led by Edward Machine gun (JO 🙂 he said in a note.
“As a result, the ticket, the average dollar amount of a transaction, not the transactions, has led to offsetting.[arison] growth through pricing, beverage customization, food sales and a move into non-coffee beverages, where Starbucks does not have the same right to win as it does in coffee. As a result, the business has become more complex, customers wait too long to receive their orders, and member loyalty has stagnated.”
The results underscored the challenges facing Niccol’s push to turn around Starbucks’ fortunes. Niccol, who took over the business in a surprise move in August, said a “fundamental change” to the company’s strategy is needed “for us to return to growth”.
He added that the company would rationalize its “overly complex menu” and adjust its “pricing architecture.” In particular, Niccol argued that Starbucks’ food and drink menu has become “too complex.”
Redburn Atlantic’s Lewis said Niccol’s plan has “merit,” adding that Starbucks is expected to return to positive comparative sales in its 2025 fiscal year. However, Lewis expressed concern about the expenses Starbucks must incur during the reform.
“In fact, this has been Starbucks’ Achilles heel since 2017, where company-operated stores have increased their revenue by 7.5%. [per annum] but the operating expenses of the stores have grown by 9.5% [per annum]which represents an 820 basis point headwind to margins,” Lewis said.
“We see a similar scenario with the Back to Starbucks plan, where the consensus does not reflect the increased costs necessary to sustain the plan.”
He added that Starbucks’ newly frothy valuation (its shares trade above a 20-year average price-earnings multiple) also leaves the company with “little room for error.”