Starbucks revisits promises ahead of its Q2 report, but key issues remain unaddressed

Starbucks (SBUX) laid out six promises ahead of its second quarter earnings — but the efforts may not pass the taste test.

Last Tuesday, the company re-shared promises, which CEO Laxman Narasimhan laid out a year ago to improve results for its employees, customers, farmers, shareholders, and others.

Some of the initiatives include creating pop-up experiences in Los Angeles, Berlin, London, Shanghai, and Tokyo to "engage with younger generations." Another is a global barista championship where employees come together to compete at its coffee farm, Hacienda Alsacia, in Costa Rica next year.

CEO Laxman Narasimhan told Yahoo Finance in an exclusive interview that the company has already been operating with these principles in mind but is now laying out the promises explicitly.

Narasimhan, who took the helm at the end of March 2023, said every decision Starbucks makes must fit the promises it has outlined. "This is what we are at our best," he said, adding that the promises are at the core "of what makes our company different."

However, the initiatives do not appear to solve Starbucks' more pressing key issues. In the past year, the chain has experienced flagging foot traffic in the US as inflation hit consumers' wallets and lower-than-expected sales growth in China as competition intensifies.

There have also been conflicts with its union. But last week, the company made "significant progress" in negotiations with Starbucks Workers United in contract talks, both parties said in a joint statement.

Other concerns include staffing challenges and "decreased traffic resulting from boycotts related to the conflict in the Middle East," per a client note from Wedbush analyst Nick Setyan.

Setyan added that menu innovation was positive for foot traffic in Q2. The chain also improved its speed of service and made gains in delivery and mobile orders.

Starbucks stock is down 20% in the last 12 months, compared to the S&P 500's (^GSPC) 25% gain.

Morningstar analyst Sean Dunlop said he does not believe these promises will "directly drive growth," though it's "evidence that the brand is willing to reinvest."

He added, "It's important for what it signifies, but I wouldn't necessarily look at these things as being an engine of growth in the near or long term."

Citi analyst Jon Tower, who tracks weekly foot traffic, said Starbucks store traffic "returned to positive [growth] but continues to show a longer-term trend of decelerating" as of April 24.

A difficult macro environment adds to Starbucks' challenges.

"We're in a tough restaurant environment," TD Cowen analyst Andrew Charles told Yahoo Finance over the phone. Starbucks has a strong morning business, but its afternoon business is more subject to discretionary spending, making it vulnerable to consumer pullbacks.

When it comes to product innovation, he said, many are waiting for "more impactful drivers to come."

On May 7, the company is expected to unveil a boba tea-like menu item for refreshers featuring raspberry-flavored pearls, according to a note from Stifel analyst Chris O'Cull.

O'Cull said, "While these Summer-Berry Refreshers do not appear to be tea-based, we are encouraged to see that the company may leverage a popular consumer trend, especially amongst younger consumers."

Here's what Wall Street expects from Starbucks, per Bloomberg consensus estimates:

• Adjusted earnings per share: $0.80, up 9.61% from a year ago

• Revenue: $9.13 billion, up 5% from a year ago

• Same-store sales growth: 1.46%

  • North America: 2.05%

  • US: 2.31%

  • International: 1.36%

  • China: -1.62%

• Foot traffic growth: -0.12%

• Ticket size growth: 2.01%

As of Q1 results, the company expects fiscal 2024 revenue growth to be in a range of 7% to 10%, down from the previous range of 10% to 12%. Global and US same-store sales are expected to increase 4% to 6%, down from the previous range of 5% to 7%.

China's same-store sales growth is expected to come in at low single digits for the remainder of the year, down from 4% to 6%.

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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