Jefferies Managing Director Andy Barish joins Yahoo Finance Live to discuss the outlook for Starbucks stock amid inflation and unionization efforts.

Video Transcript

JULIE HYMAN: Well, on Tuesday, we saw the original Starbucks store in Seattle unanimously vote in favor of union representation. In fact, union votes around the country, plus other factors, like Starbucks's recent guidance, have been hitting the stock. It is down more than 25% year to date. But there's one analyst who says, now's a good time to buy.

Joining us now to discuss is Jefferies managing director, Andy Barish. Andy, it is good to see you. So I want to take up the union issue first. It has-- it's only been a handful of stores thus far that have voted to unionize. Put this in context for us and whether or not it's going to be important to Starbucks as a company.

ANDY BARISH: Yeah, good morning, Julie. Thanks for having me on. It certainly has presented a headline risk. And I believe it is a contributing factor to some of the stock weakness this year. We have spoken with some experts. In fact, the former head of the SCIU, which is the union behind the organization efforts of Starbucks stores. And, you know, this is really more of a safety, respect, benefits type of grievance, if you will. And it's not really pay or wages or anything along those lines that might have a significant financial impact.

So, at this point, we feel fairly comfortable as this process moves along, even if it does result in the company having to negotiate collective bargaining agreements, that the financial impact would be relatively immaterial. Obviously, there is some reputational risk if this becomes more of a fight or a battle of words. And hopefully, just given Starbucks's ability to work through a lot of these issues that they've seen in the past and being such a progressive employer, we think there'll be a positive resolution as we move forward here on the union efforts.

BRIAN SOZZI: Andy, is incoming CEO Howard Schultz, do you think he's able-- I mean, he's a master orator. He drove the company forward when he led the company for many years. Is he able to just temper these union moves, or this is likely to happen anyway?

ANDY BARISH: No, I mean, I think with Howard coming back on an interim basis, I think it certainly does calm the waters a little bit. Howard is a very understanding and empathetic leader, a mensch, as we say, sometimes. And I think that'll lead to more constructive dialogue as things move forward here. Unlikely that anything will really get solved, though, in the next six months, which is sort of the anticipated time frame that Howard will hold the interim role until a new permanent CEO is hired probably in the fall.

BRIAN SOZZI: Andy, I don't know how much you go to Starbucks, but we go to Starbucks a fair bit here. And we have been noticing that the prices for our coffee, no real fancy orders, they have started to go through the roof. I imagine that is because those are inflation driven price increases, but do you think Starbucks is now at the point where it's now unaffordable for most people out there, and that will hit sales?

ANDY BARISH: Yeah, Brian, I mean, we're just-- we're not seeing that. Yes, they are taking price increases at a higher level than what we've seen historically. It's not been fully disclosed. But we would imagine they're probably up mid-single digits year over year across the whole product line versus kind of low single digits historically.

And we're seeing that across the restaurant industry, and obviously, across a lot of other industries in response to supply chain and commodity inflation, as well as the labor inflation, some of which is Starbucks continuing to invest in partners and stay ahead of the wage curve. And some of it is obviously market related. We haven't seen any signs of consumer stress at Starbucks in terms of product mix or anything like that. In fact, it's gone the other way.

We're seeing premium products get better uptake. We're seeing the additions of plant-based dairy, which comes with an increased cost. We're seeing the hand-blended cold beverages continue to rise as a percentage of the mix. So up to this point, even with all the headlines out there, and yes, pricing increases at Starbucks, thus far, demand has continued to be really solid.

JULIE HYMAN: Andy, as we go further into this year and as Howard Schultz retakes the company, do you think he needs to make any big changes to strategy? Do you think there's anything sort of on a high level that Starbucks has gone astray on over the past several years that he can help with?

ANDY BARISH: No, I really don't. I think strategically, the business, over the last five years, has made a fair number of changes, moving to more asset light, what they call streamlining, which included getting out of some markets where they owned and are now licensed, as well as moving the big Global Coffee Alliance fully to Nestlé in a large transaction that allowed Nestlé to continue to grow without Starbucks having to contribute a significant amount of marketing dollars or capital.

So that sort of streamlining and change in strategic imperatives has taken place over the last five years. Right now, it's really continued to grow the US business, with same store sales and unit growth primarily in suburban drive-through locations, which are performing very well. Grow China in double digits in terms of units. Obviously, there's some same-store sales challenges over there with the COVID issues. And kind of pull all that together, recover some of the operating margin, and get back to doing 10% to 12% earnings growth. And we think that's going to be very likely to be seen in fiscal '23 and be a catalyst for the stock.

BRIAN SOZZI: So you don't think, Andy, that Howard has to come out here and issue a guidance-- financial guidance reset?

ANDY BARISH: No, I mean, we've had to-- earnings downgrades with Rachel or Jerry, the new CFO, relatively new CFO, over the last couple of quarters. Obviously, you know, Omicron's impact in January when they spoke in early February after reporting the calendar 4Q, the holiday season, their fiscal 1Q, did involve some additional costs in terms of supply chain distribution. You know, sick pay, exclusion pay for Starbucks workers, which, oh, by the way, they cover fully in terms of pay when somebody calls out sick.

We think they adequately reflected those incremental costs over the next couple of quarters and are working on other areas, as we've talked about pricing, as well as some overhead cost reductions to kind of offset that. It does, however, result in what will be flattish to down quarters over the next couple of quarters in terms of lack of earnings growth. And I think that's why-- another reason why the stock has come off a little bit here. And we're still a few quarters out from seeing the earnings inflect positive again, which we think will start to get the stock moving.

JULIE HYMAN: Andy, great to see you. Thanks so much for the deep dive into Starbucks this morning. Andy Barish of Jefferies, appreciate it.