Starbucks (SBUX) is brewing up a comeback. After a difficult 2024 for the iconic Seattle-based coffee chain, including declining sales, hopes for a better 2025 come in the from a shake-up in the C-suite, with promises of a new direction moving forward. Since investors are still waiting to see if the turnaround can be trusted, I currently have a neutral stance on SBUX stock. However, I believe that the company’s upcoming financial results will be a crucial test for the share price.
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With its Fiscal Q1 earnings just around the corner, investors won’t have to wait long to get their first impressions of the turnaround efforts. Starbucks is scheduled to reveal its numbers on Jan. 28. In this article, I will detail Starbucks’ recent trajectory, its struggles, its turnaround strategy, and what to expect from the upcoming financial results.
Developments at Starbucks
Much of my skepticism about Starbucks’ outlook has been based on the increasing pressure the company has been under. In the last three years, SBUX stock declined 13.3% in 2022, 2% in 2023, and 4% in 2024. The cumulative effect has been demoralizing for investors.
Naturally, the underperformance compared to the broader market indicates that the business has not been performing well. During Fiscal year 2024, Starbucks reported comparable sales that were down 2%, while consolidated net revenue was up 1%. On the bottom line, GAAP and adjusted earnings per share (EPS) were $3.31, a year-over-year decrease of 8%.
In the last quarter, reported in late October, global comparable store sales declined by 7%, driven by an 8% decline in transactions. This drop suggests that customers are visiting locations less often, partially offset by a 2% increase in average ticket price because Starbucks has been raising prices aggressively over the last five years.
Breaking down the results by geography, Starbucks in North America saw comparable store sales decline by 6%, driven by a 10% decline in transactions, partially offset by a 4% increase in average ticket. But it didn’t stop there. In the international segment, especially China, sales declined by 9%, driven by a 5% decrease in average ticket and a 4% decline in transactions. In China, same store sales fell by 14%.
The Turnaround Strategy
Although the outlook for recent results is not very encouraging, it has to be said that the future of Starbucks has been revived by the hiring of Brian Niccol as the new CEO. The former CEO of Chipotle Mexican Grill (CMG), Niccol has an excellent reputation in the restaurant business. He arrives with the responsibility of driving a massive turnaround in Starbucks’ strategy. Arguably, the company has been facing several headwinds in recent years, mainly in day-to-day operations, including long customer wait times and inventory problems. Another issue has been the massive increase in competition in the coffee business, with fast food chains such as McDonald’s (MCD) offering more affordable pricing options.
The new CEO’s first steps have already been taken. In Q4, the first quarter with Niccol in command, the Seattle-based company suspended its guidance for Fiscal year 2025 amid ongoing challenges. Starbucks now plans to reduce the number of new store openings and renovations in 2025 to focus on redesigning existing cafes. The new strategy involves making the menu simpler, to improve efficiency and wait times. The company has also pledged not to raise prices in the U.S. in 2025.
Since August, when Brian Niccol took up his new post, SBUX stock has increased as much as 34%, peaking last November. Afterward, shares plummeted by 14% on news linked to Starbucks workers going on strike in nine U.S. states during the busy holiday season. The striking workers say it’s unfair that the company invested $113 million into CEO Brian Niccol’s compensation package at a time when baristas’ wages aren’t keeping up with inflation.
Starbucks Upcoming Results
Looking now at the Fiscal Q1 results, which Starbucks is expected to report at the end of January. Despite the turnaround strategy being put in place, my outlook remains neutral as analysts’ expectations are extremely low. To beat Wall Street estimates, Starbucks will need to earn more than $0.67 per share, a year-over-year drop of around 25%, and revenues will need to come in above $9.33 billion, which would be a year-over-year drop of 1%. Such low expectations reflect all analysts covering the stock revising their earnings and revenue numbers downwards by 4.5% and 5.1%, respectively.
The upside is that Starbucks has a pretty low bar to jump for its Fiscal Q1 earnings, and a beat across the board could be enough to send shares sharply higher. However, the narrative that “it can’t go any lower” could be a risky assumption. That said, I think the main topic of conversation at the earnings day will be the turnaround measures implemented by the new CEO, mainly focusing on a strategy of making its stores more efficient, rather than opening new ones.
In Q4, Starbucks opened 722 new stores, ending with 40,200 total. In my view, it doesn’t make much sense to open 700+ new stores while the company has been dealing with so many execution problems. One of the things I would look for when the company reports its latest results is more of a focus on operational improvement and less of a focus on new locations or store openings.
Is SBUX Stock a Buy?
At TipRanks, Wall Street’s consensus on Starbucks’ stock is a Moderate Buy. Ten out of 19 analysts have a bullish stance on the coffee brand’s shares, six are neutral, and three are bearish. The average price target is $104.59, which implies an upside potential of 10%.
Conclusion
Starbucks is set to report its Fiscal Q1 earnings with relatively low expectations, which could be a double-edged sword. While the management team appears to be laser-focused on turning around the company’s strategy, it’s still too early to tell how effective these measures will be or when they will start impacting the company’s top and bottom lines. As a result, I’m cautious about SBUX stock for now. For Q1, I would like to see greater clarity and focus on improving execution at its current stores rather than continuing to expand.
