Is It Time to Sell Starbucks Stock?

The coffee giant Starbucks (SBUX -1.75%) is one of the most recognizable brands in the world. Its stores populate city blocks across the globe, and its drinks are cultural markers of the changing of the seasons -- pumpkin spice latte, anyone?

Despite coffee retail market dominance, Starbucks ran into some trouble recently. The company's stock declined steadily for the last year, down roughly 21% since last May. If there was any hope that would change in the short term, those hopes were dashed when Starbucks released its Q2 numbers. The release was a "stunning across-the-board miss on all key metrics," according to William Blair analyst Sharon Zackfia. 

As the analyst stated, the numbers missed across the board, but they can be summed up in the company's shrinking sales. Total net revenue for the company dropped this quarter, which hasn't happened since 2020, when stores were shuttered due to the COVID-19 pandemic. Take a look at the strong year-over-year growth for Q2 between 2021 and 2023 in the table below.

Table by author. Data Source: Company filings.

So what gives?

Starbucks is struggling to compete in China

The Chinese market is the company's largest single market outside the U.S. In 2023, sales in the country accounted for nearly a third of all international revenue. Although the total pales in comparison to domestic sales, China is a critical component of the company's strategy. It offers much more room for growth than the more saturated domestic market. That's why the poor numbers out of China are so concerning.

Despite having 14% more stores in the country this year, sales dropped 11%. The company's total transactions declined by 4%, and the average ticket (parlance for the money Starbucks brings in off each sale) shrank by 8%. It's clear that something is not right.

The company is facing stiff competition from companies like Luckin Coffee, its main competitor. Luckin surpassed Starbucks in sales last year for the first time, now holding the top spot in the country. Why? Luckin and other Chinese retailers are undercutting Starbucks on price. As Chinese consumers face a slowing economy with stagnating wages, they seem to care more for affordable coffee than a premium brand.

Addressing the dwindling sales out of China, CEO Laxman Narasimhan stated in the latest earnings call, "We see fierce competition among value players in the market, but we are strengthening our premium position." It seems Starbucks is doubling down on its premium label, focusing on shoring up its position with consumers who can afford its coffee. Time will tell if this strategy pays off, but given the broader economic picture in China, I'm not sure it's the right tact.

The picture isn't all that different here in the U.S.

Starbucks's woes in the domestic market -- where it earns the lion's share of its total revenue -- share similarities with its issues in China. Fewer people are making purchases at Starbucks and revenue is slipping; comparable store sales declined 3%, while transactions dropped 7%.

Although the U.S. economy is doing just fine by many metrics, American spending habits have shifted; many are tightening their belts when it comes to purchases they view as luxury. Research from Mckinsey & Company shows a drop in "net intent" -- a measure of whether consumers plan on spending more or less than they typically do -- of 8% in the coming quarter for non-alcoholic beverages.

Narasimhan, in the same earnings call, addressed the "impact of a more cautious consumer, particularly with our more occasional customer" and noted that this issue "may persist longer" but that "much is within [their] control." Among the initiatives the company is taking to bring these customers back into the store is launching new products and "reach and demonstrate more value" for them. This is a noble aim, but how the company reaches these consumers and whether it's effective is what matters, not the intention to do so.

Starbucks still has a lot to offer and an incredible brand

The company has faced issues, but it still has a lot going for it. It is undoubtedly one of the most recognizable brands on the planet, and that doesn't change with a few quarters of disappointing numbers. The company is aware of the issues and is taking steps to address them, like a major shakeup in global leadership. A new geographical CEO with extensive experience in Asian markets was just announced to oversee the international division.

Pay close attention to the next few quarters. If Starbucks can reverse some of these trends, it will prove it is still a force to be reckoned with. Now is not the time to sell, but it's not the time to buy, either.