Starbucks: consumers still get a buzz from small luxuries

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Will pumpkin spice lattes replace lipsticks as a recession-proof indulgence? It is a reasonable assumption to make, judging by the grande-sized quarterly sales and profit gains Starbucks served up this week. 

Despite concerns over a slowdown in its two biggest markets, US and China, the coffee group reported an 11 per cent rise in revenue to $9.4bn. That is a new high. Net income jumped almost 40 per cent to $1.2bn as coffee enthusiasts proved willing to pay more for their caffeine fixes.

Yet including the gain made following the latest set of earnings, Starbucks shares are up just 3 per cent this year and down almost a fifth from their July 2021 peaks. The stock is trading below its three-year average on a forward earnings multiple basis.

The lack of froth may reflect fears that in the event of an economic downturn, more coffee drinkers will opt to brew their own cup of joe at home. Retailers such as Home Depot have reported a pullback in sales of big-ticket items. Fast-food restaurant operators such as McDonald’s say they are seeing a dip in visits from lower-income consumers.

But investors should not underestimate Starbucks’ staying power as an affordable luxury.

So far, Starbucks says it has not seen much change in demand. It reported healthy sales gains in both North America and China. It expects revenue for the fiscal 2024 year to grow at the low end of the 10 to 12 per cent range and earnings growth of 15 to 20 per cent.

Efficiency gains, forecast to be $3bn over the next three years, should give the company room to hit sales and earnings targets. Starbucks’ food offerings provide another hedge against a slowdown. Sales of baked goods and breakfast sandwiches generated almost $6bn — or 22 per cent of sales in North America in the fiscal year that just ended. The coffee chain’s shares have room to perk up further.