Starbucks needs to turn things around quickly

There’s no way around it, Starbucks (Network -3.64%) had a tough second quarter. The big coffee chain just isn’t resonating as well with customers right now. While there are a number of reasons why, investors should be paying close attention to sales, and more importantly, same-store sales, right now. Here’s why.

What went wrong at Starbucks

Starbucks didn’t see a sudden shortage of customers. In fact, it generated $8.6 billion in sales in the second quarter of 2024, showing that it remains the leading restaurant chain for coffee lovers. That translated to adjusted earnings of $0.68 per share. But that number was down 8% from the same quarter a year ago. So there’s something going on here that investors need to understand.

Image source: Getty Images.

One of the biggest concerns is same-store sales, which are down 4%. Same-store sales take into account the performance of locations that have been open for at least a year. It’s basically a measure of how well a company’s core business is doing. If same-store sales are up, the concept is still resonating with consumers. If same-store sales are down, well, that could spell trouble because customers aren’t coming back like they used to.

Now, Starbucks customers are pulling out. Interestingly, transactions are down 6%, and a 2% price increase erased the entire decline, leaving same-store sales down 4%. There are a number of reasons for this, from customers balking at price increases to cost-conscious consumers simply switching to cheaper coffee more broadly. After all, Starbucks is essentially selling a luxury food product that can often be found for free in offices or for less elsewhere (or at home).

Second-order negative at Starbucks

But here’s what’s particularly troubling for Starbucks today: It opened 364 new locations in the second quarter. New locations bring in a significant amount of revenue and can often cover weak same-store sales. That’s why same-store sales were down 4%, but overall sales were down only 2%. But Starbucks seems to be at a point where the performance of its existing stores is having a much bigger impact than that of new stores.

It’s probably not reasonable to expect a large chain like Starbucks to post huge same-store sales numbers. Low single-digit numbers are good enough, noting that McDonald’s boasted of achieving a three-year run of same-store sales growth of “almost 2%” when it reported first-quarter results. (That streak ended in the second quarter, when same-store sales fell 1%.) Still, the combination of new stores and weak same-store sales at Starbucks is a worrying sign, and management needs to start working harder to reverse underlying business trends.

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To be fair, Starbucks same-store sales rose 5% in the first quarter. And one bad quarter doesn’t make a trend. So investors shouldn’t think the house is on fire. But if you own Starbucks, you should be paying close attention to the stock now. If the third quarter is weak, that could indeed be the start of a trend.

Starbucks isn’t going anywhere

Starbucks is a successful coffee chain; it’s highly unlikely that the company will suddenly go bankrupt. However, the stock has been doing very poorly for some time now, and the ugly same-store sales numbers in the second quarter won’t help investors. And while the stock looks historically cheap, given that its price-to-earnings ratio is currently about half of its five-year average, if same-store sales turn negative and stay there, there’s a good chance the stock could get even cheaper.