Starbucks Is Back, But Is It a Buy?

0:04Earnings season has begun and Starbucks is back. Motley Fool Money starts now.

0:20Welcome to Motley Fool Money. I'm Travis Hoyam, joined by Rachel Warren and Lou Whiteman. We have really gotten into earnings season. We're in kind of the meat of it over the next couple of weeks. And the big report this morning was Starbucks. Rachel, what did we learn? So Starbucks, it was a quarter of mixed performance, which I think is something we've seen for a while, but there was some improvement in a few key areas. We saw some signs of turnaround in consumer traffic. They actually beat on revenue, and this was even as profit was below what analysts were hoping for. So global and U.S. comparable store sales increased by 4 % year over year, and that was a significant return to growth that was driven by a 3 % increase in traffic.

0:59So this is some indication that customers are actually returning to cafes, that Starbucks back to Starbucks strategy might be working. Net revenue was up about 6 % year over year. Same store sales in China grew 7%. And this is something that's notable. I mean, this is the second largest market for Starbucks. It's been an area in which they have been struggling. I think one thing that is clear from their results this quarter and in recent ones is the company is really sacrificing immediate profit for long-term growth. They're investing in wages, in their labor force, and in technology, and a bid to get back to more sustainable growth.

1:38One of the things that I will note, in China specifically, the company's in the process of entering a joint venture with Wiyu Capital to operate its retail presence in China. So, they'll reduce their direct stake. They're going to turn to a licensing model while maintaining brand control. It's a more asset-light approach. It's one that they have turned to in a lot of their newer international markets in Europe and the Middle East and Africa. They're viewing fiscal 2026 as a transition year. And I think that's something that's important to note. This next year, they're looking to open between 600 to 650 net new company owned and licensed cafes.

2:13And this is also as they're shuttering about 400 U.S. locations coming out of 2025. So it's a time of big shifts and changes for the business. Not really anything to write home about, but we are starting to see some early signs of improvement that investors should pay close attention to. Lou, what stuck out to you? Rachel mentioned the same-store sales growth. That's always something that you look at with retail operations like this. They were negative from March of 2024 through two quarters ago. Now we're at least positive. All those comps are a little easier than they were a year or two ago.

2:50Yeah, there's nothing really to complain about in this quarter. I think the business is getting healthier, and I think that's a good thing. As an investor, I struggle to see why I should be excited about this or why I should care. For one thing, as Rachel noted, they are dumping the fastest-growing, most interesting part of this business. Now, for China, I know it's a licensing agreement. They can still asset life. But China, international revenue is up 10%. North America revenue up 3%. Which part are you getting rid of again? Again, maybe getting rid of isn't fair. But Travis, is 3 % comp store sales, is that worth investing into?

3:28Is even 5 %? Is 3 % revenue growth really reason to get excited? I feel like they're stabilizing. They're basically back to where they were two years ago. Yes, this was positive, but we're going from a negative comp to a positive comp. You add those two together, and you're basically where you were in 2023. Here's what I didn't hear, which is what I think as an investor I want to hear. Again, I'm not shorting this either. I think the business is doing what they should. But what is your plan for long-term market-beating growth? I think that's really, really hard for Starbucks to do, especially as they go asset-light international.

4:07It used to be international was a growth story. They can still, yes, benefit from China and all of that, but you are neutering some of that long-term international growth story. I think it's so important to separate. I know this is the opposite by what you know, and there's room for everything, but just because you like the company or just because you think the company is doing the right thing, that doesn't make it a winning investment. Starbucks very much falls into that camp right now. I like what they're doing. I think Nichols is doing the right thing. As an investor, I see other opportunities for market-beating growth outside of Starbucks, which is a very mature coffee retailer.

4:48Is the thinking there that, I'll just put some numbers behind this, on a trailing basis, the price-to-earnings multiple is almost 60. Even on a forward basis, we're looking at a price-to-earnings multiple of 36. This could be a phenomenal business, but if it's going to be growing at 5%, which they've done over the last three years, you probably don't want to pay that kind of multiple. You want to pay more like 10, 15 times earnings. Is that the way to think about it, this can be a phenomenal business, but it's a steady business, it's not a high-growth business, and it isn't worth paying that premium.

5:18And for the most part, with exceptions, Wall Street pays for growth, right? So, I think growth does matter. Rachel mentioned, they're trying to get better in the stores. Part of that is higher wages. Part of that is trying to, I joke, but 20 % of the world's global warming emissions come from Starbucks drive-thrus, it feels like. I mean, you get stuck in a Starbucks drive-through for 30 minutes at times. Often, there's no way out, too. Right. Oh, yeah, yeah, yeah. No, you are just stuck there. They do need to invest in all these problems. But again, just as an investor, I'm looking at margin growth, I'm looking at revenue growth, I'm looking at just the things you look for in a growth investment.

5:58I don't think they're ready to be just a stodgy old bank stock or something. I don't know what role it plays in portfolio, I know what role it plays in my consumer life when I really want coffee. But that isn't a big enough hurdle. That isn't the hurdle I'm looking at as an investor. Rachel, how are you thinking about this valuation? Is this the kind of stock that you are interested in buying? Is the price too high? Do you think it's fairly valued? Where's your head at? Because this does look like a company that's maybe turning a corner operationally, but like Lou said, the price maybe isn't quite as compelling as it was.

6:33Yeah, I agree with Lou on that. I don't think the price is nearly as compelling as it was. And Starbucks is kind of in a difficult position right now, because if they don't invest in their growth story and the way that they are doing so aggressively, they are going to continue to fall behind the competition. And that's been one of the key issues they have faced in recent years. And that's evidenced by the fact that profits are down high double-digit percentage year over year. They're really putting profits on the back burner to focus on that growth story right now. I think in the short term, that's the right call.

7:03I think if you're an investor looking at this stock, you have to believe that they are going to be able to really successfully execute this turnaround and do so in a meaningfully profitable way. I think we're maybe starting to see the very early signs of that. I mean, some of those growth numbers I talked about earlier was some of the first growth we'd seen on those metrics in a couple of years. But I think it's still very, very early days for the strategy. So I would personally proceed with caution. For today, the market does seem to like what they saw stocks up about 4 % early in trading on Wednesday.

7:35When we come back, we're going to talk about another solid earnings report from General Motors. What's going on there? You're listening to Motley Fool Money. When Johann Rahl received the letter on Christmas Day, 1776, he put it away to read later. Maybe he thought it was a season's greeting and wanted to save it for the fireside. But what it actually was, was a warning, delivered to the Hessian colonel, letting him know that General George Washington was crossing the Delaware and would soon attack his forces. The next day, when Rahl lost the Battle of Trenton and died from two colonial Boxing Day musket balls, the letter was found, unopened, in his vest pocket.

8:14As someone with 15 ,000 unread emails in his inbox, I feel like there's a lesson there. Oh well, this is The Constant, a history of getting things wrong. I'm Mark Chrysler. Every episode, we look at the bad ideas, mistakes, and accidents that misshaped our world. Find us at constantpodcast.com or wherever you get your podcasts.

8:41Welcome back to Motley Fool Money. Big earnings report from General Motors, one of those companies that's generally unloved by the market. Tesla gets all of the attention in the auto business. But guess what? General Motors growing faster than Tesla today. They're also doing so very profitably. Stock was up about 7 % in response to earnings yesterday. Rachel, what stuck out to you? Yeah. Well, I mean, first of all, net income came in at about$2.7 billion for the fiscal year. Now, that was down from$6 billion a year ago. That type of declining growth is something we've been seeing for them for the last couple of years.

9:12Now, there's some good reasons for that. A huge driver of that was the net loss they reported in Q4 of about$3.3 billion. And that was driven by over$7.2 billion in special charges, primarily for realigning their EV capacity to meet lower than expected consumer demand. There's also - And that's something similar we saw from Ford, too. Correct. Correct. And there was also a$1.1 billion charge for restructuring in China. Revenue came in about$185 billion for the fiscal year. You know, despite the hype around electric vehicles, their growth has been primarily driven by their internal combustion engine vehicles, so specifically large trucks and SUVs.

9:51And so this strategy is providing them with consistent, strong profit margins in North America. And they're taking a pretty measured approach to their expansion. They're navigating a very high-cost, high-demand and lower-demand phases that have shifted a lot the last few years by focusing on cost efficiencies. They're still maintaining the number two position in the USAV market. Tesla has high growth potential, but its stock has experienced a lot of volatility. And more recently, General Motors has been able to deliver more stable, consistent performance. I think that's what the market's favoring now.

10:26But we see a bit of a push and pull with that dynamic in various markets. and that dynamic tends to shift with time. Charles, I just want to say, I want to push back at the premise here and comparing it to Tesla, okay? Because look, yes, they're beating Tesla, but they're losing to the S &P 500 over every period I can look at since the IPO. One of the things that has really plagued Detroit over the years is this obsession with Tesla versus the obsession of just running a good business. So, I reject that as a bogey to shoot at. The whole industry would be better off if they just let Tesla do Tesla and focused on them.

11:05To Mary Barr's credit, I think that that's what they're doing. I think it was a fine quarter. It's a bounce back. It's a tough market. When times are good, it's a single-digit gross margin business most of the time. I don't understand necessarily the excitement, but they're doing very well. with what they do. Yeah, this is definitely not a high growth company, but a year or so ago, they were trading for four or five times earnings. So at some point, if they can maintain that profitability, the narrative a few years ago was that they were done for because of companies like Tesla. Speaking of their progress, Lou, one of the things that stuck out to me is they have made a lot of vague announcements about their autonomy strategy.

11:54They actually put something out that said that they were going to be eyes off, so hands off and eyes off with the Cadillac Escalade in 2028. I don't know if that's calendar 2028 or model year 2028, which may come out a little bit earlier, but that's at least getting them to the point where they're not only matching what FSD can do today, but even taking that to the next level. Is that a big deal? Is that going to be par for the course for all these companies? Or how should we think about that? Because it seems like GM at least isn't falling behind when it comes to autonomy. I mean, my favorite part of this is the truck is going to glow turquoise when it's on.

12:30So, all the cars on the road will be able to see it, which is good. Look, eyes off is good progression. And no, this isn't just kind of robo-taxis. This is not always on. The car will decide when it feels comfortable enough to do it. This is slow evolution, not amazing. They announced this back in October. I know they're using NVIDIA systems. I know they have some of the software baked in, but OK, so not the NVIDIA software, but NVIDIA chips. There's a lot of off the shelf here. It is their secret sauce, but I think the whole world is moving in this direction. I don't know if it matters if you get there in 2028 versus 2030.

13:13Just like, look, Tesla was years ahead in announcing full self-driving. Did that really work against GM and where they are now? No, I mean, I don't think, I mean, I think the battle of press releases is one thing, but I'm much more just interested in seeing these goals get hit over time. I think everyone's getting there. Rachel, is autonomy a big deal? And then the other thing I wanted to bring up was the buybacks. They announced another$6 billion worth of buybacks. They're going to just continue, they're buying back somewhere between 10 % and 15 % of their shares outstanding every single year.

13:47You would think eventually that should be good for shareholders, but it isn't necessarily like Lou said, been a market beater over time. Yeah, a couple things to hit on there. I do think that the hands-off, eyes-off tech is interesting. I don't think we've gotten enough details about it yet to get too excited. That 2028 system, it's expected to achieve level three autonomy. It integrates a combination of LiDAR, radar, and cameras for 360 degree awareness. And it's worth noting, you know, after they shut down the cruise robo-taxi business following the safety incident a couple of years ago, they folded that technology and team back into their mainstream operations to develop this system.

14:26So, there is a lot of really impressive manpower there, still a few years away. So, I think we'll see if and how this bears out. With the buybacks, they've initiated a new$6 billion stock buyback program. This follows their$10 billion accelerated share repurchases that they initiated in late 2023. And it's worth noting, these buybacks have significantly reduce the number of outstanding shares, which boosts earnings per share, even if net income stays flat. I think that's something to underscore as an investor. This is kind of par for the course for the company. I think if you believe that these actions, they've also consistently hiked their dividend, about 20 % increase for 2026.

15:08If you think that that is something that's compelling as an investor, maybe it's an attractively valued stock. The growth profile for me hasn't been one that I have wanted to add to my portfolio, but it's certainly a solid business. Kind of same answer as with Starbucks. I hate to be a broken record here, but yes, the share count is down 30 % plus over the last five years. And did I mention they're still losing to the market over that time? So I don't, I mean, they're doing the right thing. I am, I'm here to praise Mary Bar and company, not, not trash them as an investor. There's other places I'd rather look.

15:46When we come back, we're going to see if silver is one of those places, Lou is looking for investments. You're listening to Motley Flow Money.

16:15and get you until the 17th of February your new favorite deal on Spasim.de.

16:45you don't know all the technology that silver goes into. That's not what's driving this demand. This is a weak dollar story. There is a political - Explain that. How does the weak dollar impact silver or gold in this way? Basically, what we're seeing is you are selling the dollar and looking to other places. There's just an inverse relation here. We have from the White House that we're not worried about the dollar going down. There's not the quote-unquote risk if you're a Forex trader of intervention here, or at least there's not the perceived risk. We'll see how true that ends up being. There's not the natural buffer on this.

17:28It's important to note here, though, Travis, that so many huge, huge pronouncements are being made about this in the pundit class. This isn't something to worry about yet. It's something to watch. The weak dollar does impact our purchasing power. It should mean that our exports are more attractive on foreign markets. However, there are other geopolitical things going on, tariffs, et cetera, that could work against that. So, the fear here is that nothing but downside, a weaker consumer without the benefit in exporting. That said, Global Forex is a$10 trillion daily volume market. And it's highly leveraged, too, isn't it?

18:09Yeah. But the point being is that it doesn't necessarily take a dramatic all-or-nothing move to move these things. I think what you're seeing here is just incrementally, buyers and sellers from all over the world changing their risk profile just a bit. So, they're just lessening their dollar reliance a bit. They're not dumping the dollar. And that is playing out in small portions that add up over time. So if everybody goes from 80 % dollar to 75 % dollar, it is both the dollar is still king and a weakening dollar. I think that's more what's going on here than it is just the dollar is dead, but certainly something to watch.

18:53Yeah, I mean, and I think Lou makes some very good points there. Central banks, institutional investors have been diversifying their holdings and moving away from some of the dollar dominated assets. And, you know, again, precious metals like gold and silver, they're generally priced in U.S. dollars. So if you've got a weaker dollar, it makes them cheaper for foreign investors. There is some industrial demand that's supporting the rally of areas like silver. But there's been a really significant influx of retail investors. There's been a lot of speculative interest there. So I think that's where we're seeing a lot of that meme stock-like behavior.

19:25And that also means that there could be the potential for a correction. So I think that's something to be aware of as investors if you're looking at silver or gold right now. As long as central banks continue to accumulate gold and fiscal debt remains high, that trend's likely to persist. It doesn't necessarily mean that you as an individual retail investor need to go in on it. It's important to really understand what you're buying. It's also interesting to me that Bitcoin has not followed this same trend, which I think was always the narrative with that asset. So we'll see what happens with something that we're going to be monitoring because it does, like we said, impact the real economy over time.

20:00As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis Hoyam. We'll see you here tomorrow.

20:30You