ii view: investors back Starbucks' recovery strategy

First-quarter results to 29 December 

• Revenue flat at $9.4 billion
• Adjusted earnings down 22% to $0.69 per share
• Global comparable store sales down 4%

Chief executive Brian Niccol said:

“While we’re only one quarter into our turnaround, we’re moving quickly to act on the 'Back to Starbucks' efforts and we’ve seen a positive response.” 

“We believe this is the fundamental change in strategy needed to solve our underlying issues, restore confidence in our brand and return the business to sustainable, long-term growth.”

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ii round-up:

Starbucks Corp (NASDAQ:SBUX) detailed a fourth consecutive quarterly fall in same store sales as the global coffee chain looks to drive a recovery under its ‘Back to Starbucks’ transformation plan. 

First-quarter comparable sales to the 29 December fell 4%, with an average 3% increase in product prices more than offset by a 6% fall in transaction numbers. Chief executive since September 2024, Brian Niccol, is now implementing initiatives including simplifying the menu and increasing staff numbers. 

Shares in the S&P 500 company rose 2% in post results trading having come into this latest news down 5% in 2024. That’s similar to fast food provider McDonald's Corp (NYSE:MCD) but in contrast to a 23% gain for the S&P 500 index. 

Flat quarterly revenue of $9.4 billion just beat Wall Street hopes of $9.3 billion, with adjusted earnings down 22% year-over-year to $0.69, exceeding forecasts of $0.67 per share.

Comparable sales for its core US business, accounting for almost three-quarters of overall revenues, slipped 4%, hindered by an 8% fall in transactions numbers. 

Comparable sales in China, generating close to a tenth of group revenues, fell 6%, hit by a 2% fall in pricing and 4% retreat in transaction numbers. 

Other management recovery initiatives include better separating out customers who are collecting orders made in advance on their mobiles and those ordering in-store, along with a revamp in marketing and fewer discount offers.   

ii view:

Set up in 1971 and headquartered in Seattle, Washington, Starbucks today operates in around 80 countries. A net new 377 stores opened during this latest period gives a total of 40.576, with around 53% operated directly and 47% licenced out or franchised. Other major countries of interest are the combined Japan, UK and Canada at close to 13% of overall sales. 

For investors, an uncertain economic outlook for its customers including still heightened borrowing costs cannot be forgotten. Investment in improving staff wages and readjusting stores now weigh against earnings. Relations between the West and China are now more strained following the Ukraine conflict, while a forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap.  

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To the upside, CEO and former executive of Chipotle Mexican Grill Inc (NYSE:CMG), Procter & Gamble Co (NYSE:PG) and Yum Brands Inc (NYSE:YUM), Brian Niccol, is now pursuing a recovery strategy focused on improving customer serving times. A diversity of geographical regions exists. new stores are still being opened, while a dividend yield of around 2.4% is not to be ignored. 

For now, a continuing decline in same store demand is reason for caution. That said, shares in the iconic coffee house are trading at prices not seen since 2023, and investors are likely to remain interested given it's a play on the daily staple nature of coffee for many consumers globally.

Positives: 

• Diverse geographical footprint
• Strong brand

Negatives:

• Elevated costs
• Currency moves can hinder

The average rating of stock market analysts:

Strong hold