Is Starbucks' Stock in Trouble?

Shares of Starbucks (SBUX -0.87%) can’t seem to get out of a rut. The stock is sinking, and while it hits new lows, investors remain hesitant on investing in the business despite its strong brand.

Inflation has made its high-priced coffee look even more expensive, and it has given consumers an easy way to reduce their spending by switching to cheaper, competing brands. Meanwhile, labor issues have resulted in its costs rising higher, putting the business on a questionable path forward. The company’s recent quarterly results also didn’t inspire much confidence that the company is going in the right direction.

Is Starbucks’ stock in trouble? Is it heading for more of a decline? Or could this be a terrific buying opportunity for investors?

Lack of growth is Starbucks’ biggest problem

One concerning trend for Starbucks is that for the past two quarters, its comparable-store sales have been declining. That’s a concerning metric because comparable-sales numbers are only a factor in stores which have already been open in the prior-year period. It effectively creates an apples-to-apples comparison since the growth rate isn’t getting a boost from new store openings, and it gives investors a good indicator of how well existing locations are doing.

Here’s how Starbucks has performed in recent quarters on this metric:

Source: Company filings.

What’s notable is that with the change in the average ticket being constant, it’s the number of transactions which has been primarily responsible for the change in the comparable-growth rate. It looks as though Starbucks has simply struggled to get people into its stores. Even if customers were purchasing the same amount of product as they did a year ago, that would technically still be enough to result in a positive comparable-growth rate, with the change in the average ticket providing a modest boost.

But this trend could flip in future quarters, as Starbucks has lately been offering more aggressive discounts, which may draw in more people; but a reduced ticket size could negate that benefit.

Should long-term investors worry about this troubling trend?

It’s not a good sign to see comparable-store sales decline, but investors shouldn’t push the panic button on Starbucks just yet. Two quarters is still only two quarters. This isn’t proof that the business is broken. The company has still generated $4.1 billion in profit over the trailing 12 months. And free cash flow during that stretch was only slightly lower at $3.8 billion.

The company is generating ample money to potentially invest into new growth opportunities. Starbucks says it is working on making “operational improvements” which can help improve efficiency. That, in turn, can help lead to greater sales and profits in future quarters.

Investors should, however, remember that economic conditions aren’t great right now due to inflation. And there’s still the possibility that things can get worse for Starbucks if a global recession takes place in the months ahead, and demand continues to soften. While there are things that Starbucks can do to fix some problems, it won’t be able to fix all of them if its consumers are struggling financially.

Should you buy Starbucks stock?

Shares of Starbucks are down more than 20% this year, and it’s trading within a few dollars of its 52-week low of $71.55. At 21 times its trailing earnings, the coffee stock is trading at a slightly lower multiple than the average S&P 500 stock, which is averaging a price-to-earnings (P/E) multiple of 24.

I would want more of a discount before buying Starbucks stock simply because of the potential headwinds still ahead for the business and the economy as a whole. Starbucks can recover from these challenges, but it can take a while, especially if there’s a prolonged recession which weighs down the global consumer market.