Here's why Starbucks shares can rally after a quarterly earnings miss

Published Tue, Jan 30 20248:38 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Starbucks on Tuesday reported first-quarter earnings and sales that, technically, missed Wall Street estimates — but it was hardly a surprise to investors, including us. Revenue for the three months ended Dec. 31 totaled $9.43 billion, below the $9.59 billion expected by analysts, according to LSEG. On a year-over-year basis, sales rose 8.2%. Starbucks' adjusted earnings per share of 90 cents missed the 93-cent estimate, LSEG data showed. In the year-ago period, the coffee chain earned an adjusted 75 cents per share. Bottom line As Jim Cramer had warned , Starbucks came up short amid a slowdown in business due to Middle East protests and a sluggish economic activity in China. And the market was expecting it, too. Investors have been selling shares of the coffee chain in recent weeks, with its stock price down more than 12% since its recent high in November of about $107 per share. Over the same period, the S & P 500 rallied over 9%. The market action Tuesday night is a good example of what can happen to a stock when the entire market knows its dealing with a temporary issue. Everyone knew a shortfall was coming, but what the market needed to hear was an action plan to ensure the headwind would be temporary and that there were enough levers to pull on the cost and efficiency side to maintain earnings. Management did enough to convince the market it has a great handle on its business. Buyers were waiting for the bad news to come up, and that's how you get a stock up bout 3% after hours on a top and bottom line miss. Still, the comparable store sales challenges in the U.S. and China force us to be less upbeat about the company's prospects than we were after prior quarter. To reflect that, we are lowering our price target to $115 from $125 but maintaining our 1 rating. Quarterly commentary Comparable store sales in North America — a key restaurant industry metric — rose 5% in the three months ended Dec. 31, below the 7.1% growth forecasted by Wall Street analysts, according to FactSet. Total sales in the region rose 8.69% year over year to $7.12 billion, falling short of the Street estimate of $7.22 billion. One bright spot in North America: The company's operating income exceeded expectations, rising 25.4% on an annual basis, to $1.52 billion, compared with analysts' $1.44 billion projection. Starbucks's performance in the region was hurt by social media boycotts targeting the company due to misperceptions on its stance toward the Israel-Hamas war , CEO Laxman Narasimhan said on the earnings call. Beginning in mid-November, Starbucks saw traffic at U.S. stores soften, Narasimhan said, specifically among occasional customers who typically visited in the afternoons. Some of these occasional customers began to return in December, Narasimhan said, as Starbucks embarked on initiatives to overcome the challenges, including brand marketing and social media engagement. To be sure, the CEO cautioned, "it will take time for our plans to be fully realized." Loyal customers remained just that, with their visits increasing in frequency along with the amount they spend in each transaction, Narasimhan said. "That part of the business is extremely strong," the CEO said. In Starbucks' international segment, comparable store sales rose 7% as transactions increased 11% but ticket amount dropped 3%. Meanwhile, quarterly revenue rose 9.9% to $1.85 billion, missing Wall Street estimates of $2.1 billion. The international business faced multiple headwinds in the first quarter, management said, including a slowdown in sales at stores in the Middle East region and a slower-than-expected recovery in China drive by a "more cautious consumer," Narasimhan said. Comparable store sales in China rose 10%, the company said, below the the 17% estimate, according to Bloomberg data. In a nod to rising competition from local players in China, Narasimhan said the Chinese coffee market is going through a transition. But he emphasized the company's long-term confidence in the opportunity in the world's second-largest economy. On multiple occasions, management said Starbucks is targeting the premium corner of that huge market. Guidance While CFO Rachel Ruggeri stressed that the business challenges Starbucks faced in the first quarter are "transitory," it did lower its full-year guidance for revenue growth and comparable store sales, as a result. But, most notably, Starbucks kept its earnings-per share growth outlook unchanged, with Ruggeri stressing full-year EPS is still expected to grow between 15% to 20%. "We have multiple paths to such earnings growth, as we demonstrated in the first quarter," Ruggeri said. Ruggeri said Starbucks now forecasts full-year global revenue growth of 7% to 10%, compared with its prior range of 10% to 12%. It expects full-year comparable sales on a global basis and in the U.S. to grow 4% to 6%. Prior guidance for both was 5% to 7%. (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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A Starbucks logo at a location in New York on Aug. 17, 2023.

Gabby Jones | Bloomberg | Getty Images

Starbucks on Tuesday reported first-quarter earnings and sales that, technically, missed Wall Street estimates — but it was hardly a surprise to investors, including us.