Starbucks CEO’s honeymoon is over after sales slump, shares dive

Laxman Narasimhan’s honeymoon phase is over.

The chief executive officer of Starbucks Corp., who officially took over the coffee behemoth just over a year ago, on Tuesday cut annual guidance for a third straight quarter after the company’s worst performance since the pandemic. Each of Starbucks’ geographic segments posted a decline, including the all-important China, where comparable sales fell 11%.

In a sign that Starbucks expects more pain ahead, the chain cut its full-year revenue growth forecast to a low-single-digit percentage from as much as 10%. Adjusted earnings per share could be flat. Shares plunged by as much as 16%, the worst drop since March 2020.

The downbeat performance raises questions about how Narasimhan will lure customers back to Starbucks, which as recently as November said demand for iced shaken espressos was resilient and expressed confidence in its forecast. Narasimhan will have to convince investors – including his predecessor, Howard Schultz, who made Starbucks a global household name – that his plan will be enough as persistent inflation finally breaks demand for little treats.

“The significant reversal of fortune for Starbucks begs the question of whether bigger – and tougher – issues are afoot, such as if the company has overreached on price or if the brand’s appeal has lost some of its luster,” William Blair analyst Sharon Zackfia said in a note to clients.

Far cry

It’s a far cry from the state of affairs that Narasimhan inherited from Schultz, who stepped down from his third stint as CEO in March of last year. Schultz returned to help usher the company through the pandemic and contend with a growing unionization movement. The company spent about six months searching for a successor and another half-year training Narasimhan for the role under Schultz.

At the time, Starbucks was struggling to meet elevated demand for its beverages, including the increasingly popular cold drinks. Schultz hatched a plan to help Starbucks adapt and laid out lofty growth goals that Narasimhan had to carry forward.

Narasimhan came over from British consumer-goods company Reckitt Benckiser Group Plc, where he was known for making fast changes to turn around the struggling business. Starbucks, by contrast, was meant to be a growth story fueled by revenge-spending among consumers seeking affordable indulgences.

Now, Starbucks is contending with a pullback from price conscious-consumers. Even the number of active domestic rewards members – who are usually its most loyal fans – took a rare dip in the quarter. The company has also pointed to misperceptions regarding its stance on the Israel-Hamas war as hurting its Middle East business.

“If the sales challenges were skewed more to ‘misinformation’ issues about the brand, the market would view them as transient,” Guggenheim Partners analyst Gregory Francfort wrote in a note. But infrequent customers are avoiding the brand because of its perceived high prices, he said, “which means that fixing these issues could be a bigger lift.”

Growth Effort

In a bid to restart growth, the company is looking to fulfill demand in the mornings, which accounts for about half of its U.S. business. It wants to boost product availability and cut wait times, saying delays are prompting many clients to abandon their mobile orders. It’s also working to get more customers to try its app in hopes that deals will attract occasional consumers, and that they’ll eventually sign up for the loyalty program.

Starbucks is also betting that new products, such as a boba-like drink lineup and a low-calorie energy drink, will also coax customers into stores. The Seattle-based chain is also expanding its food lineup in its latest attempt to bring coffee-loving guests in the door outside of peak morning hours.

The company is planning to add drive-thrus to the bulk of new U.S. locations, and it’s spending $600 million for tech upgrades such as digital menu boards. Moreover, Starbucks has recently been offering deals like half-off on drinks.

The apparent step up in new product launches raises questions about how easily baristas can handle the menu changes, Stifel analyst Chris O’Cull wrote. And even with lowered targets, Starbucks will be in “a show-me state” about whether it can reignite growth, Zackfia said.