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Starbucks: 2 Red Flags to Explain The 40% Decline

Motley Fool - Sat Jul 2, 6:20AM CDT

The stock market is volatile, dragging share prices down across the board. But don't let that become an excuse; some stocks are falling for a reason.

That might include coffee chain Starbucks(NASDAQ: SBUX); its share prices have fallen nearly 40% from highs over the past year.

There's no arguing the brand power that Starbucks has, but investors should keep an eye on these two potential problems for the company.

1. Leadership uncertainty

Starbucks is a multidecade growth story, but it isn't without ups and downs. Howard Shultz took over the company in the late 1980s when there were just 20 stores, and he grew the company into a juggernaut with 2,500 locations when he first stepped down in 2000.

However, he returned to the role during the financial crisis in 2008 to rescue the company and lead it to its next growth phase before stepping down again in 2017.

After former CEO Kevin Johnson left the position this past April, Schultz was again thrust back into the CEO role. Starbucks is looking for its next CEO while Schultz serves in the interim.

He's been there every time Starbucks has run into trouble over the decades, but Schultz is now 68, and there might not be much time left for him to lead the company.

Investors will soon have unproven leadership at Starbucks. The restaurant business is notoriously competitive, and while Starbucks is a powerful brand that might function just fine without Schultz, it's an unknown right now. Uncertainty is frowned upon in bear markets.

2. Unions are gaining momentum

The mounting problem of labor unions is adding more questions for investors to ponder. Roughly 70 stores have unionized across 25 states, with 225 more petitioning for votes just six months after the first store, a location in New York, became the first to form a union.

Unions can dramatically increase business operating costs; union members cost companies 40% more than non-union workers in 2021, according to Statista.

Howard Schultz has campaigned and met with Starbucks workers to try to discourage unionization. The next CEO will have to deal with this challenge, potentially as it swells to a head.

Such an increase in operating costs across the company could force dramatic price increases and could put Starbucks at a disadvantage against non-unionized competitors.

Here's the bottom line

No company goes decades without challenges; it's the businesses that overcome adversity that become great long-term investments, and Starbucks has answered the bell before.

The stock's decline has put shares at a price-to-earnings ratio (P/E) of 20, well below its median P/E of 30 over the past decade.

A bear market will contribute to that, but Starbucks' drop seems to go beyond Wall Street. Starbucks could navigate these rough waters, come out stronger than ever, and reward investors with excellent returns from a depressed valuation.

But these things could take time to settle, and Starbucks could remain a volatile stock in the meantime. Don't hurry to buy shares; patience could pay in this situation. If you're worried about missing out, a dollar-cost averaging strategy is something I like; you build a position slowly with multiple purchases, making sure you don't buy at the top or the bottom but a blended average over time.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends the following options: short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.

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