Starbucks shares just fell after fiscal second-quarter earnings. Time to buy the dip?

Shares of Starbucks (NASDAQ:SBUX) fell by almost 16% after a poor profit report for the second quarter of the budget year. The stock is now down about 35% in the past year.

Let's take a look at why Starbucks shares fell, what its plans are for a turnaround, and whether now is a good time to buy the stock.

Problems in China and the US

Because the US and China represent more than 60% of Starbucks' global locations, these two markets are the most important for the coffeehouse operator. Unfortunately for the company, both markets saw significant weakness during the quarter.

In the US, Starbucks saw that sales in the same store decrease of 3% compared to an increase of 12% a year ago. Traffic to the stores fell by 7%, while the average ticket price increased by 4%.

The company blamed the weak U.S. results on the weakening economic outlook and bad weather in parts of the country. Starbucks said that occasional customers in particular were visiting less often. Higher prices, along with a shift to more expensive cold drinks, helped drive up the average ticket.

In China, meanwhile, comparable store sales fell 11%, compared with a 3% increase a year ago. Traffic to stores fell by 4%, while the average ticket fell by 8%. Starbucks became more promotional in China in the fourth quarter, when the average ticket fell 9%. However, that contributed to a 21% increase in traffic. More promotions and lower prices did not have the same impact in the first quarter of 2024.

Starbucks said that, similar to the US, casual customers in China were visiting their coffee shops less often. According to the report, this was due to macroeconomic weakness, competition and a return to more normal behavior after the market reopened last year.

Turnaround plan

Given the poor results, Starbucks has no intention of sitting still; it has made efforts to help turn around its activities.

In the US, it will look to improve throughput by reducing wait times and improving product availability. Management said the company is currently struggling to meet peak morning demand, and app customers often place items in their carts but do not complete their purchases due to long wait times.

As a result, Starbucks is rolling out its equipment-controlled siren system and refining the way it is used to expedite orders. The company is also investing in its Deep Brew artificial intelligence (AI) technology to both improve wait times and create greater transparency into wait times, as well as supply chain investments.

Starbucks will also launch more innovative menu offerings, including both beverages and food items, with an emphasis on coffee drinks. The company is also testing longer nighttime opening hours, with deliveries between 5 p.m. and 5 a.m. The company is also exploring better ways to connect with casual customers through the app so that these customers can see special offers.

In China, meanwhile, the company said it continues to play the long game. The strategy continues to make technology investments to digitalize the stores and continue to innovate by offering locally relevant menu items. It will also continue to open more locations in China, especially in lower-tier markets and provincial-level cities, where the economics of new stores perform better.

A takeaway cup of iced coffee.A takeaway cup of iced coffee.

Image source: Getty Images.

Is it time to buy the dip?

Starbucks' problems in the US are likely temporary, but won't be solved overnight. After years of price increases due to a climate of high inflation, consumers are starting to cut back. While Starbucks has a solid plan to revive growth in the US, these initiatives are unlikely to help in the short term if consumer purchasing power continues to weaken. However, they could set the company up well in the longer term.

China is the biggest concern because the competitive landscape is fierce. Luckin coffee (OTC: LKNC.Y) and other competitors continue to rapidly expand their number of locations across the country while offering lower prices. Luckin opened no fewer than 2,342 new stores in the first quarter. Even Yum China Holdings (NYSE: YUMC)the owner of KFC in China, has gotten into the coffee game with its KCoffee brand and has a joint venture with Italian coffee roaster Lavazza for Lavazza-branded coffee shops.

China is not only Starbucks' second largest market, but also its largest market for opening new locations. Right now it seems like China is overrun with coffee shops.

Trading at one future price-earnings ratio (P/E) With a ratio of about 20, Starbucks is at one of the lowest valuations in quite some time. This isn't the first time the company has been under pressure, with founder Howard Schultz returning as the company's CEO in 2008 to right the ship and turn around Starbucks. Schultz just retired from the Starbucks board last year.

SBUX PE ratio (forward) chartSBUX PE ratio (forward) chart

SBUX PE ratio (forward) chart

In the long run, Starbucks should be a solid investment. However, given the issues, I see this consumer discretionary stock continuing to struggle in the near term. I would consider waiting for signs of improvement in China before buying this dip.

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Before you buy shares in Starbucks, consider the following:

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Luckin Coffee and Starbucks. The Motley Fool has one disclosure policy.

Starbucks shares just fell after fiscal second-quarter earnings. Time to buy the dip? was originally published by The Motley Fool

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