Starbucks shows progress in its turnaround but is stuck in an unloved group
Starbucks reported mixed quarterly results on Wednesday — but the numbers and earnings warrant us continuing to bet on CEO Brian Niccol’s turnaround efforts. Revenue in the fiscal fourth quarter rose 5.5% year over year to $9.57 billion, according to LSEG, beating the $9.35 billion consensus estimate. Adjusted earnings per share (EPS) totaled 52 cents in the three months ended Sept. 28, below expectations of 56 cents, according to LSEG data. On a year-over-year basis, adjusted EPS fell 35%. Same-store sales increased 1% globally, driven by an increase in comparable transactions. This beat FactSet’s forecast for a 0.3% decline. Same-store sales are an important restaurant industry metric used to soften the effects of store closings and openings as well as currency fluctuations. It is often used interchangeably with comparable store sales or comps. SBUX YTD mountain Starbucks’ year-to-date stock performance. Starbucks shares didn’t move much in extended trading Wednesday; Each fell modestly below $84. While the stock has revived somewhat in recent weeks, it’s been a rough sledding since the summer for Starbucks, along with its entire restaurant group. Sentiment towards the group has soured as investors worry about the health of the US consumer and spending on restaurants in particular. As a result, Wall Street is back on the AI wave after a brief flare-up of AI bubble fears. On the other hand, the market has no love for the restaurant group. Take a look at how shares of Chili’s parent company Brinker International traded during Wednesday’s regular session despite another remarkable quarter of same-store sales growth. Add Chipotle to the list. Shares of the burrito chain and Niccol’s former employer fell more than 10% on Wednesday night after making cautious comments about the eating habits of young consumers. In such an ugly environment, Starbucks needed to deliver a blockbuster quarter to make investors love the stock. We didn’t get a blockbuster. But it wasn’t a fiasco either; He was far from it. It’s been more than a year into Niccol’s tenure at the coffee chain, and signs of progress are growing, although the share performance doesn’t reflect it. Starbucks’ U.S. business, which has been the focus of Niccol’s turnaround efforts so far, posted flat performance at comparable stores in the July-September quarter. On the surface, this is nothing to write home about. But looking closely, Starbucks saw comps turn positive in September, and that momentum continued into October. This month-over-month change is encouraging and bodes well for Starbucks’ ability to meet Wall Street’s same-store sales expectations for the current holiday quarter. Even better, positive profits come from transactions, not higher prices or larger orders; This is a sign that customers feel better about the brand and the type of service they will receive in cafes. During the quarter, the full implementation of Starbucks’ new operating and staffing model, called Green Apron Service, went into effect at company-owned U.S. stores. On the earnings call, Niccol said it’s paying off, with more than 80% of locations meeting the “4 minutes or less” service goal. This was even true with the seasonal return of pumpkin spice lattes and other fall drinks, leading to a surge in transactions. “I think the fourth quarter was a turning point for us in our U.S. operations,” Niccol said on the call. “So we’re clearly not declaring any victory. We still have a lot of work ahead of us, but it’s clear we’re moving in the right direction. And I believe we’re in the process of building the best Starbucks ever.” Another highlight of the quarter: Same-store sales in the highly competitive Chinese market rose 2%, slightly better than expected, driven by a 9% increase in comparable transactions. This was partially offset by a 7% decrease in spend per customer, known as average ticket size. But a decrease in ticket size was expected as Starbucks lowered its prices in China to better compete with local rivals. The most important thing is that Starbucks has achieved positive results for a quarter in a row in China after a period of brutal decline. Considering Starbucks is actively shopping around as part of its China business, this is helping the business grow again. Putting it all together, Wednesday night’s subdued market reaction is a classic example of a good quarter, bad group situation. Indeed, Jim Cramer noted Wednesday night that Starbucks is available for purchase at current prices. Accordingly, we reiterate our 1 buy equivalent rating and $100 price target. Comments Starbucks mostly came out on top in the fourth quarter, both companywide and in key U.S. and Chinese markets. However, skeptics of the Starbucks story will be quick to point to its performance on profitability metrics, both adjusted EPS and adjusted operating margin, to justify staying on the sidelines. From where? One of the most important extremes of the Starbucks bear case is that Niccol’s decision to significantly increase headcount at its U.S. stores and spend a lot of money retooling locations limited the company’s earnings power, limiting the stock’s eventual rise. While it’s true that Starbucks’ operating margins missed Street expectations for three quarters, our view is that Niccol’s efforts will deliver meaningful top-line growth and, combined with cost discipline in other parts of the business, including the corporate office, the company can deliver satisfactory earnings growth. We are willing to be patient to see this. Starbucks plans to provide official 2026 and long-term guidance at its investor day in January. Hopefully this event will provide clarity to investors on the timeline for earnings change. For now, CFO Cathy Smith offered some reassurance on the earnings growth dynamic Wednesday night. “This starts with total revenue. We expect to continue to see these transactions grow, and we’re optimistic about that. We have the right plan to make it happen.” [Niccol has] summarized. And over time, earnings will be delayed. So, we said you will increase your income first and then the earnings will follow. But we’re taking all necessary precautions to make sure each transaction is more profitable going forward, and I’ll leave it at that for now.” On that note, Starbucks closed 627 stores in the quarter as part of a restructuring plan announced in September, the vast majority of which were in the U.S. or Canada. During the conference call, Smith explained that those stores did not meet the company’s customer experience standards and many were not making money. The result of these closures will reduce North American revenue but have a slightly positive impact on operating margins (Jim Cramer’s Charitable Trust has long It is SBUX. See here for a full list of stocks.) As a subscriber to the CNBC Investment Club with Jim Cramer, you will receive a transaction alert before Jim buys or sells a stock in his charitable foundation’s portfolio. INVESTMENT CLUB INFORMATION ABOVE, WITH DISCLAIMER. THE INVESTMENT CLUB HAS NO OBLIGATION OR DUTY THEREOF OR GUARANTEE OF A PARTICULAR RESULT OR PROFIT RESULTING FROM THE RECEPTION OF ANY INFORMATION PROVIDED IN CONNECTION THEREOF.
