Starbucks' Sales May Get a Boost This Quarter, but It Could Come at the Cost of Lower Margins

In its most recent quarter, Starbucks’ sales declined by 2%.

Starbucks (SBUX -0.28%) needs to find a way to get its business going again. The company has been struggling to grow its top line, and investors have been dumping the stock. Year to date, Starbucks’ stock has fallen by around 20%. It’s trading near its 52-week low but even though its valuation is reduced, investors haven’t been rushing to buy the stock.

The company is working on ways to generate growth, but it could come at a steep cost: lower margins.

Starbucks is ramping up promotions

Consumers are trying to cut costs amid inflation and swapping out Starbucks coffee for something cheaper is an easy way to accomplish that. With many coffee shops to choose from, Starbucks’ brand loyalty is being tested. And the results haven’t been great as sales have been declining.

In an effort to win back customers, rather than lowering prices, Starbucks is offering more promotions, including buy-one-get-one offers.

By offering steep 50% discounts, the coffee chain can become a more viable option for price-conscious customers. And according to The Wall Street Journal, the discounts are so significant that this is the first time in more than 10 years that it is offering coffee and breakfast food together for a combined price as low as $5.

That could be a surefire way to grow its top line. The problem, however, is that it may not necessarily help earnings.

The company’s margins need help, too

Discounts can help bring in more traffic and generate much-needed sales growth, but given the steep type of promotions Starbucks is reportedly offering, it’s not sales that investors should be paying attention to in upcoming quarters, it’s profits. By offering significant promotions, the company is likely going to report thinner margins. And they have already been trending downward.

SBUX Profit Margin (Quarterly) Chart

SBUX Profit Margin (Quarterly) data by YCharts

The current quarter will nonetheless be an insightful one to see whether the promotions have a significant impact for the business. In the first three months of the year, Starbucks’ consolidated net revenue declined by 2% to $8.6 billion as it battled what it referred to as a “complex operating environment.” The company’s net earnings, however, were down by an even steeper rate of 15%.

While sales may get a boost from these aggressive promotions, the company’s bottom line may not. The real test will be what happens in future quarters, to see whether customers keep coming back after the promotions end, or if this will just be a one-time boost.

Should you invest in Starbucks stock?

Promotions may help win back some customers but I’m not convinced that this will be enough to turn the company’s fortunes around. I would have preferred to see the company come up with an innovative new drink or something that wouldn’t focus strictly on price, as that may end up only attracting discount shoppers with little or no brand loyalty and who may end up leaving when the promotions expire.

In the long run, I still like Starbucks as it has built up a strong brand over the years and it’s eyeing a lot more growth and expansion in the future. As a buy-and-hold investment, it’s worth picking up the coffee stock right now and simply hanging on to it, but I don’t believe that the company’s latest move, to offer steep discounts, is going to turn things around in the near future. If you’re willing to be patient, this can be a good stock to buy right now.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.

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