Is Starbucks stock in trouble?

Shares Starbucks (Network -0.87%) can’t get out of a rut. The stock is down, and even though it’s hitting new lows, investors are still hesitant to invest in the company despite its strong brand.

Inflation has made its pricey coffee seem even more expensive, and has given consumers an easy way to cut expenses by switching to cheaper, competing brands. Meanwhile, labor woes have driven up costs, putting the company on a questionable path to growth. The company’s latest quarterly results also haven’t inspired much confidence that the company is headed in the right direction.

Are Starbucks shares in trouble? Are they headed for further declines? Or is this a great buying opportunity for investors?

Lack of growth is Starbucks’ biggest problem

A worrying trend for Starbucks is that comparable-store sales have been declining over the past two quarters. This is a worrying metric because comparable-store sales numbers are only a factor for stores that were opened in the previous year. This effectively creates an apples-to-apples comparison, since the growth rate is not being boosted by new store openings, and investors are getting a good indication of how well existing locations are doing.

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

Source: Company documents.

What is notable is that, with the average price holding constant, the number of transactions was the main driver of the change in the comparable growth rate. It seems that Starbucks simply had trouble getting people into its stores. Even if customers had been buying the same amount of products as they had been a year ago, that would still technically be enough to produce a positive comparable growth rate, and the change in the average price would have provided a modest increase.

However, this trend may reverse in the coming quarters as Starbucks has been offering more aggressive discounts lately, which may attract more people; however, the lower receipt value may negate this benefit.

Should long-term investors be concerned about this disturbing trend?

It’s not a good sign that comparable-store sales are declining, but investors shouldn’t hit the panic button on Starbucks just yet. Two quarters is still just two quarters. That’s not proof the business is broken. The company still generated $4.1 billion in profit over the past 12 months. And free cash flow was only slightly lower at $3.8 billion during that period.

The company is generating enough cash to potentially invest in new growth opportunities. Starbucks says it is working to make “operational improvements” that could help increase efficiency. That, in turn, could help boost sales and profits in future quarters.

Investors should keep in mind, however, that economic conditions are not the best right now due to inflation. And there is still a chance that Starbucks’ situation could worsen if a global recession hits in the coming months and demand continues to weaken. While Starbucks can do some things to address some of the issues, it won’t be able to address all of them if its consumers are struggling financially.

Is Starbucks stock worth buying?

Starbucks shares are down more than 20% this year and are trading within a few dollars of a 52-week low of $71.55. At 21 times last year’s earnings, the coffee company’s stock is trading at a slightly lower multiple than average S&P500 stocks with an average price-to-earnings (P/E) ratio of 24.

I would like to get a bigger discount before buying Starbucks stock, simply because of the potential headwinds that still lie ahead for the company and the broader economy. Starbucks could recover from these challenges, but it could take some time, especially if there is a prolonged recession that weighs on the global consumer market.

David Jagielski has no position in any stocks mentioned. The Motley Fool has a position in and recommends Starbucks. The Motley Fool has a disclosure policy.