During the US stock earnings season, it's not uncommon for companies to report earnings bombs, and this time it's the well-known brand Starbucks (SBUX.US) that has been hit.

Recently, Starbucks released its financial report for the second quarter of the fiscal year 2024, with several figures falling short of market expectations.

Influenced by the earnings news, Starbucks saw a massive drop of 15.9% on May 1st (local time), with a significant gap down, marking the largest decline since March 2020.

What exactly was the performance like in the second quarter?

Currently, Starbucks' revenue mainly comes from three business segments: 1) North America, including the United States and Canada; 2) International, including China, Japan, Asia-Pacific, Europe, the Middle East, Africa, Latin America, and the Caribbean; and 3) Channel Development.

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The financial report for the second quarter of the fiscal year 2024 shows that Starbucks achieved revenue of $8.56 billion, a year-over-year decrease of 2%, which is below market expectations; it achieved a net profit attributable to the parent company of $770 million, a year-over-year decrease of 15%; and the adjusted earnings per share were $0.70, also below market expectations.

Looking at the regional breakdown, the North America segment achieved revenue of $6.38 billion in the second quarter, which was in line with the same period last year, mainly due to a 3% year-over-year decrease in same-store sales, significantly below market expectations.

Among them, the US market contributed revenue of $5.96 billion in the second quarter, which was essentially flat with last year, but same-store sales decreased by 3% year-over-year, not meeting market expectations.

The International segment achieved revenue of $1.76 billion in the second quarter, a year-over-year decline of 5%, mainly due to a 6% year-over-year decrease in same-store sales, while exchange rates had an unfavorable impact of about 5%.In the second quarter, the Chinese market contributed $710 million, a year-on-year decrease of 8%, with same-store sales in this market plummeting by 11% year-over-year, also significantly underperforming expectations. It is worth mentioning that in the crucial Chinese market, Luckin Coffee (LKNCY.US) has overtaken Starbucks to become the "coffee king" in China, with its total sales in the Chinese market for 2023 already surpassing those of Starbucks.

Starbucks' CEO stated that the company will continue to implement three key elements of its China strategy: 1) offering more locally relevant coffee innovation products; 2) increasing significant technology investments to enhance omnichannel capabilities and digitally empower stores; 3) in light of the strong economic performance of new stores in the lower-tier market, further expanding into this market, especially in new county-level cities.

Additionally, the channel development division achieved revenue of 420 million yuan in the second quarter, a year-on-year decrease of 13%, mainly due to the decline in global coffee alliance income following the sale of the Seattle's Best Coffee brand last year and subsequent SKU optimization.

Overall, Starbucks' global same-store sales decreased by 4% year-over-year in the second quarter, marking the first decline since 2020 and significantly underperforming market expectations.

Downgrading performance growth expectations, Starbucks is viewed pessimistically.

Regarding the second quarter's performance, Starbucks' CEO stated that the results for this quarter do not reflect the strength of the company's brand, its capabilities, or future opportunities, in a highly challenging environment, and the company is confident in its long-term development.

However, facing numerous challenges, Starbucks continued to downgrade its growth expectations for 2024. Starbucks expects global revenue growth to be in the low single digits for 2024, significantly lower than the previous forecast range of 7% to 10%. At the same time, global and U.S. same-store sales are expected to decline or remain flat in the low single digits. Furthermore, Starbucks has also lowered its expectations for China's same-store sales and global store growth.

After releasing the performance and downgrading the performance growth expectations, Starbucks has also been viewed pessimistically by some institutions.

Among them, Wells Fargo reduced its target price for Starbucks from $105 per share to $90; UBS maintained a neutral rating on Starbucks but lowered its target price from $95 to $85; Deutsche Bank analysts changed their rating on Starbucks from "buy" to "hold," with a target price of $89; J.P. Morgan also lowered its target price for Starbucks from $100 to $92.From the current perspective, Starbucks is indeed facing challenges, and its performance in the Chinese market has seriously dragged down its overall performance. The CEO of Starbucks has proposed three measures, but the ultimate effectiveness remains to be verified by time.