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Shares of Starbucks declined in after-hours trading on Tuesday following the release of quarterly results that fell short of expectations. Despite this stock reaction, there are positive indicators from the turnaround strategy of new CEO Brian Niccol that suggest potential for future growth.
The coffee chain reported a revenue increase of 2.3% year over year, totaling $8.76 billion for the fiscal second quarter of 2025. This figure did not meet analyst projections of $8.82 billion, as reported by LSEG. Additionally, adjusted earnings per share (EPS) were recorded at 41 cents, which also fell below the anticipated 49 cents. Compared to last year, this marks a 40% drop in adjusted EPS.
Assessing the Turnaround Efforts
Turnaround strategies are inherently challenging. In February, when the stock peaked above $110 per share, we cautioned on the necessity of securing profits given the complexities of turnarounds. Despite confidence in CEO Brian Niccol’s capabilities—widely seen as an influential leader in the food industry—we anticipated inevitable hurdles.
As the stock has declined nearly 30% since February 28, we began reinvesting in Starbucks shares at lower price points. During the conference call on Tuesday, further declines in stock value were noted, particularly due to Niccol and CFO Cathy Smith highlighting the point that EPS may not be the optimal metric for evaluating the company’s turnaround.
We concur, especially considering the substantial investments Starbucks is making for sustainable growth. While some investors express concern over ongoing margin pressures, especially amid economic uncertainties, the results reflect a progressive path forward. Niccol shared optimistic metrics, such as an approximate 80% increase in the percentage of stores showing positive transaction comparisons from the first to the second quarter.
Quarterly Performance Overview
In North America, net sales growth was lower than expected, with comparable sales in the region dropping by 1%, slightly worse than the 0.9% anticipated. However, this marks a significant recovery from a 4% decline observed in the previous quarter. For the U.S., which dominates the North American market, net revenue rose by 2%, yet comparable sales fell by 2%, surpassing the predicted 0.5% decline.
A 4% drop in transactions raises concerns, but it is important to note that this is an improvement from an 8% decline in the previous quarter. Niccol referenced early signs of a rebound, indicating reduced declines in transactions throughout various parts of the day and enhancements in customer satisfaction. An essential aspect of this strategy is improving service speed; Niccol aims to ensure that every drink ordered is served within four minutes. Starbucks is testing a new order sequencing algorithm that has been effective in speeding up service times without compromising mobile orders, reducing average wait times by two minutes in some locations.
Challenges and Opportunities
Despite these strides, North American margins have been underwhelming, with a year-over-year contraction of 640 basis points in operating margins due to reduced sales leverage and increased labor expenses related to the “Back to Starbucks” initiative. On a positive note, employee turnover has decreased to below 50%, a record low, indicating improved staff tenure and expertise.
International Market Insights
Internationally, the sales figures were comparatively robust. Net revenue grew by 6% year over year, accompanied by a 2% rise in comparable sales, outpacing the anticipated 1.7% decline. This growth stemmed from a 3% increase in transaction volume, despite a 1% decrease in ticket size. Notably, eight of Starbucks’ top ten international markets reported stable or positive comparable sales growth.
In China, a market that has faced challenges, the results showed signs of recovery as net revenue increased by 5% year over year, partly aided by a 9% rise in store count. Comparable sales were flat, breaking a streak of four consecutive quarterly declines, and slightly exceeding expectations. Niccol reaffirmed Starbucks’ commitment to the Chinese market, expressing optimism about its future potential and ongoing product adjustments tailored for this competitive terrain.
Looking Forward
Starbucks has not provided specific guidance for the full fiscal year 2025. While we continue to support the potential within the company under Niccol’s leadership, we are adjusting our price target from $115 to $100 per share in light of economic uncertainties and a potentially gradual earnings rebound.
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