Starbucks’ earnings report was weak — but Wall Street expected worse

Wall Street is shaking off Starbucks’ weak quarterly report, seemingly taking executives at their word that the company’s challenges are “transitory.”

The coffee giant’s stock ticked higher in morning trading, hours after it reported fiscal first-quarter earnings and revenue that missed Wall Street’s estimates and lowered its full-year sales outlook. Including Wednesday morning’s move, shares have fallen about 13% over the last year, dragging the company’s market cap down to roughly $110 billion.

Some investors had prepared themselves for worse news on Tuesday evening. Morgan Stanley analyst Brian Harbour wrote in a note to clients that the company’s earnings per share and U.S. same-store sales growth was better than some had feared, “likely supporting the stock.”

Starbucks CEO Laxman Narasimhan blamed three headwinds for the disappointing results: war in the Middle East weakening its local licensees’ sales, “misperceptions” in the U.S. over the company’s stance on the Israel-Hamas war, and a “more cautious” consumer in China.

Executives also tried to convey that those challenges are expected to subside as fiscal 2024 progresses.

Starbucks is already trying to bring back its U.S. customers through promotions and social media spending that clarifies its position on the Middle East. Executives also said that the company has several new drinks on the way, which could attract those occasional customers.

While Starbucks lowered its full-year outlook for revenue and same-store sales growth, it reiterated its forecast for fiscal 2024 earnings per share growth. BMO Capital Markets analyst Andrew Strelzik wrote that investors were likely expecting the company to lower its earnings outlook as well, so reaffirming that forecast could lift the stock price in the near term.

Others took that as a sign of the company’s overall strength.

“[It illustrates] the multifaceted strength of Starbucks’s business model and its ability to deliver results even in a more erratic top-line environment,” William Blair analyst Sharon Zackfia wrote in a note to clients.