Argus Research has maintained its HOLD rating for Starbucks Corp. (NASDAQ: SBUX), reflecting challenges in customer traffic, supply chain pressures, and rising labor costs. Despite robust expansion efforts and growth in loyalty membership, disappointing fiscal Q4 2024 results signal difficulties in maintaining earnings momentum. Argus has revised its FY25 EPS estimate downward to $3.20 from $4.00. While the company retains long-term growth potential, immediate challenges prevent it from being a compelling investment at current valuation levels.

1. Investment Thesis: Short-Term Challenges Offset Long-Term Potential

HOLD Recommendation: Starbucks faces near-term headwinds, including weak same-store sales, higher operating costs, and global economic uncertainty.

Growth Prospects: Starbucks remains a dominant player in the global coffee market, supported by its ongoing unit expansion and pricing power. However, current valuations reflect these strengths, limiting upside potential in the short term.

2. Financial Highlights: Weak Q4 Results

Declining Earnings:

Fiscal Q4 2024 operating earnings fell to $0.80 per share, down from $1.00 in the prior-year period and below the consensus estimate of $0.89.
Full-year EPS dropped to $3.31 in FY24, compared to $3.55 in FY23.
Revenue Miss: Revenue declined 3% YoY to $9.1 billion, missing the consensus estimate by $23 million, driven by lower customer traffic and weaker sales in both domestic and international markets.

Margins Under Pressure: The adjusted operating margin contracted 380 basis points to 14.4%, reflecting higher wages, product promotions, and less favorable operating leverage.

3. Geographical Performance

North America: Comps fell 6%, with a 10% drop in customer traffic partially offset by a 4% increase in the average ticket.

International Markets: Comps declined 9%, impacted by geopolitical conflicts and weaker consumer spending. In China, same-store sales dropped 14%, reflecting a 6% reduction in traffic and an 8% decrease in average ticket size.

4. Strategic Developments and Expansion Efforts

Unit Growth: Starbucks added 722 net new stores in Q4 2024, reflecting its commitment to global expansion.

Loyalty Program Growth: U.S. loyalty membership grew by 4% to 33.8 million members, underscoring the company’s ability to retain engaged customers despite headwinds.

Operational Efficiency: Price hikes and operational improvements partially offset rising costs, demonstrating the company’s resilience.

5. Revised Outlook and Guidance

EPS Projections:

FY25 EPS estimate reduced to $3.20 from $4.00.
FY26 EPS estimate set at $3.80, reflecting a potential recovery and 19% YoY growth.
Revenue Forecast: FY25 revenue is expected to stabilize with incremental contributions from new stores and menu innovations.

6. Valuation and Dividend Analysis

Current Valuation: SBUX shares closed at $97.55 on Nov. 15, 2024, trading at 31x FY24 EPS, reflecting a fully valued stock.

Dividend Yield: The annualized dividend was raised by 7% to $2.44, providing a yield of 2.5%. Dividend growth reflects management’s confidence in the company’s long-term prospects.

7. Risks to Consider

Economic Sensitivity: Rising inflation and geopolitical tensions could further suppress consumer spending, especially in international markets.

Competitive Pressure: Aggressive moves by competitors, including McDonald's and Dunkin', could erode Starbucks' market share.

Operational Risks: Supply chain disruptions and rising labor costs may continue to pressure margins.

8. Analyst Commentary

John Staszak, CFA, Argus Research: “While Starbucks demonstrates resilience through expansion and loyalty growth, near-term challenges, including declining traffic and rising costs, weigh on its performance. We see limited upside potential at current valuations and recommend a HOLD until conditions improve.”

9. Actionable Insights for Investors

HOLD for Now: Investors are advised to wait for signs of improved customer traffic and cost containment before considering additional positions.

Watch for Entry Points: A pullback to the $90–$93 range could provide an attractive entry level for long-term investors.

Dividend Stability: The reliable dividend yield of 2.5% makes Starbucks appealing for income-focused portfolios, even amid near-term uncertainties.

Conclusion

Starbucks remains a global coffee powerhouse, but immediate challenges, including weak same-store sales and rising costs, cloud its short-term outlook. While the company’s loyalty program and global expansion support long-term growth, current valuations appear stretched. Investors are encouraged to maintain a cautious stance, holding shares until operational improvements materialize.