After unexpected weakness in Q2 financial report, Starbucks (SBUX.O) is working on a comeback plan. The world's largest coffee chain saw a 3% decline in same-store sales in North America and a 6% decline in the international market, primarily due to weak demand and intensified competition in the Chinese market.

Starbucks, whose stock has fallen nearly 17% this year, looks oversold. However, the company is still growing rapidly, attracting new customers by opening small stores, increasing efficiency and launching diversified products. If these measures are successful, the stock price may rebound significantly.

American consumers' consumption of coffee is also growing. According to the National Coffee Association, two-thirds of American adults have had coffee in the past day. The proportion of consumers who buy coffee from coffee shops almost doubled in the past day, from 8% last year to 15% in 2024.

According to the industry report "Project Café USA 2024" from coffee consulting company World Coffee Portal, the U.S. coffee shop market grew by 8% in the past year to nearly $50 billion, which is 4% higher than pre-pandemic levels. Starbucks, with more than 16,000 stores, is still the market leader, occupying 40% of the market share.

"It's difficult to maintain same-store sales growth, but Starbucks is still a powerful brand operating in the global coffee market at an unprecedented scale," said Jeffrey Young, CEO of Allegra Group, the parent company of World Coffee Portal.

However, Starbucks also faces some resistance. Inflation has weakened consumers' willingness to spend. Its sales have been affected by its stance on the Israeli-Hamas conflict and its efforts to unionize employees. Boutique coffee shops and smaller chains like Dutch Bros and Scooter's Coffee are rapidly expanding, grabbing market share from Starbucks.

Consumers often no longer choose cheap items on the menu, but stop buying from Starbucks altogether and instead meet their needs at convenience stores or at home. In addition, Starbucks has not been able to gain business from higher-end brands, as it is already a high-end brand in the coffee market.

"Leisure drinkers who might have bought a cold brew in the afternoon or a Frappuccino on the weekend are nowhere to be found," said Sean Dunlop, an analyst at Morningstar.

Despite this, Starbucks continues to grow. In the past four quarters, it has added nearly 600 stores in North America and 1,700 overseas. Penetration rates in emerging markets such as India, Southeast Asia and Latin America remain relatively low, leaving room for growth.

This helps to alleviate short-term weakness in the domestic market. Although its footprint is expanding, there is hardly any sign of self-cannibalization. The average annual sales of company-operated stores continue to rise, reaching $2.3 million in FY2023.

"They're the dominant player in a product that's addictive. You really can't find a better business model than that," said Burns McKinney, portfolio manager at NFJ Investment Group, which holds the stock.

In addition to unparalleled scale, what keeps Starbucks ahead is its constantly innovating business model and products.

In the past decade, the company has made a major shift in cold drinks; these drinks now account for more than 60% of its beverage orders. Many drinks have added flavored syrups and extra shots of espresso, differentiating the brand from competitors and driving up prices.

Starbucks also continues to launch new products to attract younger customers, who are increasingly seeking interesting flavors and textures. According to the company, the lavender-flavored drink that debuted this spring was very popular.

Starbucks has also launched drinks containing soft jelly balls and a new energy drink that will soon be released. These may help boost sales in the afternoon, said Eric Strange, portfolio manager at Bahl & Gaynor, whose fund holds the stock.

While Starbucks takes pride in being a social gathering place outside of work and home, it is rapidly transforming into a brand that focuses on convenience. In recent years, many new stores have drive-thru lanes, and mobile orders now account for 31% of total transactions.

Increased order volume and increasing customer requests have brought some operational challenges. In the latest earnings call, management noted that about a mid-single-digit percentage of Starbucks' mobile orders go unfulfilled, possibly due to long wait times.

The company is taking steps to improve efficiency, such as using compact workstations and reducing the need for baristas to move back and forth when making cold drinks. It has also introduced faster-brewing coffee and machines that keep food warm for ready access.

"As consumers start to feel better, Starbucks will benefit from the increase in trading volume from these investments," said Dunlop of Morningstar.

"Our teams are working hard to re-accelerate growth and momentum across the US business," Starbucks told Barron's.

Starbucks said that the social media boycott sparked by its dispute with the union Workers United has hurt sales, but the company insists that misinformation was the reason for the boycott.

But management has been in negotiations with the union since April, and the easing of tensions could help quell some of the negative media sentiment around the company. "It looks like Starbucks and the union have come to an agreement and won't attack each other in public," said BTIG analyst Peter Saleh. "They'll negotiate in private, which could be good for short-term sales."

The stock is currently trading at around $80, down 29% from its recent high in April 2023. The stock currently trades at 20 times next year's earnings, well below the five-year average of 28 times. Now is a rare buying opportunity for investors.

Among analysts surveyed by FactSet, the average target price is $88, implying a potential upside of 9%. But there could be even more upside: earnings per share are expected to grow 13% year-on-year to $4.07 in fiscal year 2025. If the valuation returns to its five-year average, the stock could break $114.

These headwinds are unlikely to dissipate in one or two quarters. Flat sales and high capital expenditures may squeeze profits and cash flow in the short term, but these issues appear to be temporary rather than structural.

"You need to have patience, but if you can, you're buying a high-end brand name at a discount," said McKinney of NFJ Investment.