According to Starbucks Corp.’s interim Chief Executive Howard Schultz, the coffee giant’s problem isn’t demand, but the challenges of meeting it.
has allotted more than $200 million to make improvements and enhancements to face the welcome challenge of having a lot of customers who want its products. That is incremental to the commitments already in place for U.S. company-owned stores.
“Simply said, we do not today have the adequate capacity to meet the growing demand for Starbucks coffee,” Schultz said on the Tuesday earnings call, according to a FactSet transcript.
“[C]ustomers are increasingly further customizing already complex hand-crafted cold beverages. The combination of shifts in customer patterns, accelerating demand and algorithms built for different customer behaviors has placed tremendous strain on our U.S. store partners.”
Among the changes that Schultz outlined are the addition of digital tipping for workers, drive-through service at 90% of new stores, and new tech and equipment across existing stores.
Upon his return, Schultz said he would suspend share buybacks in order to spend on people and shops. The company had planned to return $20 billion to shareholders over three years including both buybacks and dividends.
“Returns on our digital investments are consistently among the highest returns we generate,” Schultz said on the call.
“Which brings us to the decision we will revisit in fiscal 2023 to suspend stock buybacks. Buying back stock yields us on average about a 10% return. With Starbucks’ treasure trove of global assets, a 10% return is not satisfactory to me.”
Schultz drew a direct connection between the investments in workers and stores and the business results that Starbucks would see.
“Now imagine the accretive impact to our financials when we reengineer our stores to deliver what we’re capable of, in delivering and arming our people with tools and resources they need to one again exceed our customers’ expectations,” he said.
“At this moment, well over $1 billion is loaded on Starbucks cards waiting to be spent in our stores, and active Starbucks Rewards membership in the U.S. grew 17% over last year in Q2 to 27 million members.”
Schultz noted that Mobile Order & Pay is a $4 billion business that grew 20% over the last year, and the delivery business has reached $500 million, up 30% year-over-year.
He also teased new benefits for workers coming in September, but said the company is prohibited by law “from promising new wages and benefits at stores involved in union organizing.”
Starbucks stock rose nearly 6% in Wednesday trading after the announcement. Shares are down 32.6% for the year to date.
“While we recognize near-term challenges, we view Starbucks as one of the highest-quality growth companies in restaurants, believe the company’s investments in people and technology are the right areas to support long-terms growth, and suspect guidance around incremental investments should remove an overhang on the stock,” wrote Credit Suisse in a note.
Credit Suisse rates Starbucks shares outperform with a $103 price target, down from $122.
“Looking beyond the 2FQ, while a key question heading into earnings was how Starbucks would guide the remainder of FY22, given the lack of visibility on China, inflation and its investments, Starbucks has suspended its 2FH guidance—likely the correct move given each of these dynamic factors, but also likely to drive ongoing debate until Starbucks’ investor day in September (moved up from December),” wrote RBC Capital Markets.
RBC rates Starbucks shares sector perform and trimmed its price target by $1 to $85.
“Challenges persist across the global marketplace, and while some may veer to
the side, Starbucks is clearly steering into the skid, by layering on additional investments to drive its intermediate-to-longer-term growth,” wrote MKM Partners.
“The challenging backdrop may weigh on Starbucks shares until additional tailwinds materialize (although many contemporaries are sailing the same winds). We remain constructive on the company’s long-term prospects, which sees our buy rating unchanged, despite our lowered price target (moves to $98, from $105).”