Now is Laxman Narasimhan’s chance to sell Wall Street on how he’ll deliver on the brisk sales and profit growth targets Starbucks Corp. promised when his predecessor, Howard Schultz, was running the coffee chain.
In Starbucks’ first investor day since Schultz handed over the reins of the company he built, Narasimhan will have to explain whether the chain can still achieve 7% to 9% comparable-sales growth amid an increasingly murky consumer backdrop and volatility in China.
“Laxman has talked about ‘re-founding’ the business,” said Sharon Zackfia, an analyst at William Blair & Co. “What does that mean?” She added that concerns about the health of consumers have increased since Starbucks gave its last guidance over a year ago.
Starbucks shares have declined 7% this year through Tuesday’s close, even as sales rose almost 12% in the first three quarters of the company’s fiscal year. Profits have also climbed. Investors want clarity on how Starbucks can keep up the growth, as well as Narasimhan’s take on the “reinvention” plan that Schultz announced last fall.
If Narasimhan has a different spin on the strategy, “this would be the time to address it,” TD Cowen analyst Andrew Charles said.
The blueprint, unveiled last September, sought to fix cafés overburdened by heightened demand, a mass shift to online ordering and increased personalization. Schultz pledged to overhaul how the chain makes every Frappuccino and cup of coffee, among other changes.
It’s likely that Narasimhan — who trained under Schultz’s wing for six months before assuming the role of chief executive officer — is “very much aligned” with the founder’s vision, said Sarah Henry, a portfolio manager at Logan Capital. Still, the former Reckitt Benckiser Group Plc CEO has signaled he’ll also focus on finding efficiencies at Starbucks as way to boost earnings. Narasimhan earlier this year hired a former Target Corp. executive to oversee supply chains.
Investors are “kind of primed to listen for productivity as an element within the discussion,” Henry said.
Starbucks last fall announced the projections for same-store sales through 2025. This, coupled with margin improvements and new stores, is projected to boost earnings per share by 15% to 20%. Analysts expect results to fall squarely into those buckets in the fiscal year that ended in early October, but they see same-store sales below the company’s projected range in the following 12 months.
China Recovery
That’s in part because of doubts about economic recovery in China — Starbucks’ second-largest market, where it also faces stiff competition from lower-priced operators. The business there has experienced dramatic swings in recent years, and the company has said the long-term growth prospects are strong while acknowledging it may be a bumpy road to get there. But investors are getting impatient for details.
Starbucks has projected China same-store sales growth of 4% to 6% in fiscal 2025, according to last year’s outlook, but didn’t give a projection for 2024.
“If Starbucks were to articulate, ‘Here’s where we think China will be next year,’ I think that signals some confidence that they know what they’re doing and that they have a plan,” TD Cowen’s Charles said. “I think they really need to frankly just hold people’s hands through the strategy.”
Investors’ focus on China has weighed on the shares, Charles said. Yet another source of unease comes from the US, where Starbucks also promised 7% to 9% same-store sales growth through 2025. It’s an “audacious” target for any company, William Blair’s Zackfia said, particularly one as big as Starbucks.
Strong Brand
The coffee chain’s brand remains strong, Zackfia said, and the company has so far delivered on its targets. But the price increases that have helped bolster sales are moderating, meaning the company will have to rely more on traffic to drive growth in a period of uncertainty about Americans’ financial health.
In Charles’ view, Starbucks could bolster confidence in the US business by accelerating adoption of the so-called Siren System. The new store setup brings all elements to make cold beverages closer in, letting baristas prepare them faster, potentially boosting sales. Starbucks said in August that the configuration will be in 40% of stores by 2026.
Absent an update there, Charles expects Narasimhan to tout existing initiatives, including the growing popularity of lucrative cold beverages, the strength of the company’s app and tweaks to speed up service. Narasimhan has said that the company has “multiple paths” to deliver on its targets, but investors will be hungry for concrete details.
“My base case is that this investor meeting is literally just to get the investment community more excited about the US initiatives in place,” Charles said.
Author: Daniela Sirtori-Cortina
