Update shared on 01 Apr 2025
Fair value Decreased 5.41%Coffee Market Tightening Will Pressure Margins In The Short Term
Coffee prices have reached a 47-year high owing to extreme weather effects in top-producing countries like Brazil and Vietnam. Both types of coffee traded on the commodity market (Arabica and Robusta) gained over 60% in 2024. Meanwhile, the US Department of Agriculture (USDA) recently reduced Brazil's 2024/25 coffee production forecast from 69.9 million bags to 66.4 million bags.
Starbucks reduced its coffee price hedging format from $1 billion in 2019 to around $200 million in 2024. This strategy saves on costs, as fixed-price contracts require increasingly expensive collateral. However, it creates risks of higher price volatility. In turn, the company could either absorb rising costs and damage its margin or pass them onto consumers through higher prices and potentially damage the customer base.
Philadelphia Case Renews Unionization Risks
The federal appeals court rejected Starbucks' appeal to the National Labor Relations Board (NLRB), which ruled that the firm illegally fired two baristas who wanted to organize a union. Still, the court ruled that the NLRB exceeded its authority by ordering the firm to pay for expenses like finding new jobs and out-of-pocket medical expenses.
The Workers United union, which represents employees from 525 stores in the US staged a protest, citing inadequate wages compared to high living costs in large cities. The Christmas protest caused baristas from over 300 stores to walk off the job, while a full shutdown affected around 170 stores. Although this remains a fraction of over 16,400 domestic stores, the legal success in the Philadelphia case heightened the risk of further wage pressures.
Owing to these developments, I'm readjusting my net margin expectations to 10.5% and lowering the target price to $103.
Disclaimer
Simply Wall St analyst StjepanK holds no position in NasdaqGS:SBUX. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.