Don’t Bet on the Starbucks (SBUX) Comeback Story Just Yet

Can the coffee giant Starbucks (SBUX) turn things around under new CEO Brian Niccol and return to positive comparable sales and margin growth?

Based on Starbucks’ stock price performance after its Q4 earnings report on January 28, the market seems to think so. Shares have risen over 11% since then, contributing to an almost 50% rally since August last year, when the new CEO took over. While I think Starbucks is in a better position for a turnaround with the current management team, the relatively weak Q1 results and the next steps proposed by Mr. Niccol haven’t convinced me of SBUX’s returns to riches just yet.

I’m taking a neutral stance on Starbucks because I’m still left with more questions than answers regarding the company’s plans for regaining growth, especially with the stock trading at such high valuations. Given recent developments, betting on SBUX’s turnaround promises is not a good idea.

Two Steps Forward, One Step Back

Despite investors’ bullish reaction to Starbucks shares post earnings, driven by better-than-expected results compared to Wall Street’s initial forecasts, it was still another quarter of declines for Starbucks in key metrics.

Starting with revenue, Starbucks saw a slight decline of 0.3% year-over-year, bringing in $9.8 billion. This was better than the consensus estimate of $9.31 billion, which predicted a 1.3% drop. On the bottom line, EPS came in at $0.69, two cents above expectations, but still represented a 25% year-over-year decline. At the same time, store operating expenses rose 9% year-over-year, contributing to a significant 24% decline in operating income. Margins came in at 11.9%, showing an annual drop of 390 basis points. This reflects the operational struggles in recent years, including cost pressures, which are now showing up in declining margins.

But arguably, the most important metric—comparable sales—is still declining. In the U.S., comparable sales dropped 4% year-over-year, along with an 8% decline in traffic. A similar trend was seen in China, where comparable sales fell 6% year-over-year, and the International segment dropped by 4% overall.

Starbucks’ Make-or-Break Moment: Will Niccol’s Changes Deliver?

While Starbucks had a weak quarter overall, a big part of the low-double-digit growth in its stock price since the Q1 earnings release comes from renewed confidence in new CEO Brian Niccol’s turnaround plan, the so-called “Back to Starbucks” strategy.

To put it in context, the strategy’s first steps focus on emphasizing coffee quality, along with ramping up marketing to highlight Starbucks’ “premium coffee beverages.” Additionally, Starbucks plans to reduce discounts in a way that simplifies pricing. In the last earnings call, Mr. Niccol clarified that discounts have proven ineffective because they clash with Starbucks’ image as a quality and premium coffee provider, ultimately leading to a less-than-ideal customer experience.

Other initiatives include introducing a condiments bar where customers can make their own drinks, helping to meet the targeted four-minute wait time goal. The Starbucks management team is also removing public access to toilets, not charging extra for non-dairy milk, and starting to advertise on live television during sporting events.

If we’re sincere, this plan is nothing groundbreaking from a man who previously revolutionized fast-food chains like Chipotle (CMG). But apparently, the market sees these initial moves from the Starbucks C-suite as a turnaround story. That said, implementing Starbucks’ new strategies will increase investments and, as a result, put pressure on EPS estimates throughout 2025, which are expected to be 10.6% lower than in 2024. This should add extra pressure for the “Back to Starbucks” plan to prove itself effective sooner rather than later.

Unattractive Valuation for a Doubtful Turnaround Bet

If you judge by the market reaction, investors seem confident in Starbucks’ turnaround. But, quite frankly, I still have my doubts. My skeptical outlook becomes even more apparent when I see Starbucks’ pricey valuation multiples. At 38x forward earnings, Starbucks is trading more than twice the industry average and 24% higher than its average over the past five years. While it’s a global leader in the coffee shop industry, boasting a strong balance sheet, it’s ultimately a stock struggling with top and bottom-line growth.

Q4 results indicated that Starbucks’ core business remains challenged domestically and internationally. Even with the turnaround efforts under Mr. Niccol’s leadership and the push to attract more traffic, it’s still unclear if this is the main issue holding back better transaction numbers or if there are deeper problems like increased competition, harsh economic conditions, changing consumer behavior, or even brand fatigue. I still see more uncertainties than certainties in this respect, and a speculative turnaround at such a price tag doesn’t make sense, in my opinion.

Is Starbucks (SBUX) a Buy, Sell, or Hold?

On Wall Street, SBUX stock carries a Moderate Buy consensus rating based on 15 Buy, five Hold, and two Sell ratings over the past three months. MSFT’s average price target of $109.10 per share implies a 2.8% downside potential from current levels.

See more SBUX analyst ratings

The Sequel is Never as Good as the Original

Starbucks’ Q4 2024 results weren’t as bad as expected, which has got investors hopeful about a turnaround with CEO Brian Niccol at the helm. But honestly, I think the “Back to Starbucks” plan lacks depth or substance. Even if the ongoing streamlining boosts store traffic in the short term, there’s still a long way to go before we can call it a genuine turnaround. And there’s always the risk that the Starbucks brand has had its day and nothing will revive it again. Given the stock seems richly valued, I’ll stay on the sidelines until more consistent results emerge.

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