Starbucks’ earnings disappoint, but we’re not giving up on the stock. Here’s why
Shares of Starbucks fell in extended trading Tuesday after the coffee chain reported weaker-than-expected quarterly results. While the stock reaction is not ideal, new CEO Brian Niccol’s turnaround plan showed enough signs of progress in the quarter to keep us invested. Revenue increased 2.3% year over year to $8.76 billion in the fiscal 2025 second quarter, missing the $8.82 billion expected by analysts, according to LSEG. Adjusted earnings per share (EPS) of 41 cents missed estimates of 49 cents, LSEG data showed. On an annual basis, adjusted EPS dropped 40%. Bottom line We’ve always said turnarounds are difficult. When we were selling Starbucks stock north of $110 per share a couple of times in February — and the second sale turned out to be the last day it made a new 52-week high — we explained how it was was prudent to lock in gains and peel the position back on the stock’s way up because of how hard turnarounds are. Despite having the utmost confidence in new CEO Brian Niccol, who we think is the best operator in the food industry, we recognized speed bumps were bound to happen. Last week, with the stock down nearly 30% from its Feb. 28 close, we started buying back some of the stock we sold much higher. Shares of Starbucks tumbled as Tuesday night’s conference call progressed, and one reason for the accelerated decline could be Niccol and finance chief Cathy Smith’s emphasis that earnings per share are not the best measure of the company’s turnaround. We would agree, especially due to the heavy investments Starbucks is making today to create long-term durable growth. A lot of problems needed to be fixed here. However, we understand the ongoing margin pressure is not what investors want to hear, especially in this uncertain, tariff-filled macroeconomic environment. Still, the results Tuesday show a work in progress, but it is one that we are encouraged about based on Niccol’s optimism. For example, Niccol pointed out that from the first quarter to the second quarter, the percent of stores that had a positive transaction comp increased by about 80%. With this all in mind, we’re reiterating our buy-equivalent 1 rating . However, we are lowering our price target to $100 a share from $115 to account of the economic uncertainty and perhaps a slower-than-expected earnings recovery. Quarterly commentary North America net sales increased at a lower rate than Wall Street’s expectation, and the region’s comparable sales decline of 1% was slightly worse than the 0.9% expected. However, the significant improvement over the 4% decline in the first quarter should give investors confidence that the return to growth should happen in the quarters ahead. The U.S., which makes up the bulk of the North America region, was also a miss. Net revenue increased 2%, but comparable sales declined 2%. That’s worse than estimates of a 0.5% decline, driven by a 4% decrease in transactions partially offset by a 3% increase in ticket. While a 4% decline in transactions is never something to cheer for, the silver lining is that it marked a significant improvement from the 8% decline in the quarter before. Some of the early indicators of recovery Niccol shared on the earnings call were slowing transaction declines across every daypart and improving customer experience. Fixing throughput is also a key part of the story. Niccol’s goal is to get every drink ordered in a cafe into a customer’s hand in under four minutes. One way Starbucks is making progress on this goal is through a new order sequencing algorithm. Niccol shared that this new system – which it tested in the quarter – was effective at reducing cafe and drive-thru service times without impacting the mobile order experience. In the locations that used this new algorithm, the average wait time dropped by an average of two minutes, bringing 75% of café order lead times under four minutes at peak. However, margins in North America were quite disappointing. The company’s operating margin contracted 640 basis points year over year — driven by lower sales leverage because of the transaction decline, as well as additional labor expenses, primarily in support of the company’s “Back to Starbucks” initiative. Niccol said that employee turnover in stores has dropped below 50%, which he called a new record low, and said that “tenure is on the rise, resulting in more capable, proficient partners.” Turning to the international business, the sales results here were actually OK. Net revenue increased 6% year over year, and a comparable sales increase of 2% was much better than the 1.7% decline analysts feared. The positive sales growth was driven by a 3% increase in transactions, which is great to see, partially offset by a 1% decline in ticket. We were very encouraged to learn that eight of Starbucks’ top 10 international markets were back to flat or positive comparable sales growth. Results in China, which was been a drag lately , were not terrible, either. Net revenues increased 5% year over year, helped in part by a 9% increase in store count. Comparable sales were flat, breaking a four-quarter streak of declines, and were slightly better than expectations of a 0.4% drop. The flat comp was driven by a 4% increase in transaction, offset by a 4% decline in ticket. On the call, Niccol expressed a commitment to China for the long term, noting he sees “great potential” for the business in the future and is open to how it will achieve that growth. Niccol said the company has tweaked its product offerings in China, a fiercely competitive market, and is seeing “indicators of progress.” Among the changes are new price points on “select products,” Niccol said. Guidance The company’s guidance for the full fiscal 2025 remains suspended. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Starbucks Coffee customer using mobile app to pay in Atlanta, Georgia.
Jeff Greenberg | Universal Images Group | Getty Images
Shares of Starbucks fell in extended trading Tuesday after the coffee chain reported weaker-than-expected quarterly results. While the stock reaction is not ideal, new CEO Brian Niccol’s turnaround plan showed enough signs of progress in the quarter to keep us invested.