Starbucks shows progress in its turnaround but is stuck in an unloved group
Starbucks reported mixed quarterly results on Wednesday — but there was enough in the numbers and on the earnings call for us to continue betting on CEO Brian Niccol’s turnaround efforts. Revenue in the fiscal fourth quarter rose 5.5% on an annual basis to $9.57 billion, beating the consensus estimate of $9.35 billion, according to LSEG. Adjusted earnings per share (EPS) in the three months ended Sept. 28 totaled 52 cents, missing expectations of 56 cents, LSEG data showed. On an annual basis, adjusted EPS dropped 35%. Same-store sales increased 1% globally, driven by an increase in comparable transactions. That beat the FactSet consensus of a 0.3% decline. Same-store sales is an important restaurant industry metric used to smooth out the impact of store closures and openings, as well as currency fluctuations. It’s often used interchangeably with comparable store sales, or comps. SBUX YTD mountain Starbucks’ year-to-date stock performance. Shares of Starbucks weren’t moving much in extended trading on Wednesday, down modestly under $84 each. While the stock has perked up a bit in recent weeks, it’s been tough sledding for Starbucks since the summer — along with the entire restaurant cohort. Sentiment toward the group has been putrid as investors worry about the health of the U.S. consumer and spending on restaurants, in particular. Bottom line Wall Street is back riding the artificial intelligence wave after a brief conflagration of AI bubble fears. On the other hand, the market has no love for the restaurant group. Just look at how shares of Chili’s parent Brinker International traded in Wednesday’s regular session despite another remarkable quarter of same-store sales growth . Add Chipotle to the list. Its shares are falling more than 10% Wednesday night after the burrito chain — and Niccol’s former employer — lowered guidance and offered cautious commentary around younger consumer eating habits. Against such an ugly backdrop, Starbucks needed to deliver a blockbuster quarter for investors to show the stock any love. We didn’t get a blockbuster. But it was not a flop, either — far from it. More than a year into Niccol’s tenure at the coffee chain, the signs of progress are mounting, even if the stock performance isn’t reflecting it. Starbucks’ U.S. business — the focus of Niccol’s turnaround efforts thus far — saw flat comparable stores in the July-to-September quarter. On its face, that’s nothing to write home about. But zooming in, Starbucks saw comps turn positive in the month of September, and that momentum has continued through October. That month-to-month cadence is encouraging and bodes well for Starbucks’ ability to meet Wall Street’s same-store sales expectations for the current holiday quarter. Better yet, the positive comps are being driven by transactions, not higher prices or bigger orders, in a sign that customers are feeling better about the brand and the kind of service they’ll get at cafes. During the quarter, the full rollout of Starbucks’ new operating and staffing model — dubbed Green Apron Service — took effect at company-owned U.S. stores. On the earnings call, Niccol said it’s paying off, with more than 80% of locations meeting his “4 minutes or less” service goal. That was true even with the seasonal return of pumpkin spice lattes and other fall drinks, leading to a pickup in transactions. “I think the fourth quarter marked a turn for us in our U.S. operations,” Niccol said on the call. “So, clearly not declaring any victory. We still have a lot of work in front 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 yet.” Another highlight from the quarter: Same-store sales in the fiercely competitive Chinese market rose a slightly better-than-expected 2%, fueled by a 9% increase in comparable transactions. That was partially offset by a 7% drop in spending per customer, known as average ticket size. But with Starbucks cutting prices in China to better compete with local rivals, a decline in ticket size was expected. The most important thing is that Starbucks has now delivered back-to-back quarters of positive comps in China following a brutal stretch of declines. Considering Starbucks is actively shopping part of its China business, it helps that the business is growing again. Put it all together, and the subdued market reaction Wednesday night is a classic case of good quarter, bad group. Indeed, Jim Cramer indicated Wednesday night that Starbucks is a buy at its current prices. Accordingly, we’re reiterating our buy-equivalent 1 rating and price target of $100. Commentary Starbucks mostly delivered on the topline in the fourth quarter, both companywide and in the key U.S. and China 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. Why? One of the key prongs of the Starbucks bear case is that Niccol’s decision to significantly increase staffing at U.S. stores and spend lots of money remodeling locations will limit the company’s earnings power, capping the stock’s ultimate upside. While it is true that Starbucks’ operating margins have missed Street expectations for three quarters, our view is that Niccol’s efforts will drive meaningful topline growth and, when coupled with cost discipline in other parts of the business, including the corporate office, the company will be able to deliver satisfactory earnings growth. We’re willing to be patient to see it through. Starbucks plans to provide formal 2026 and long-term guidance at an investor day in January. Hopefully, that event will provide investors with clarity on the timeline for an earnings inflection. For now, CFO Cathy Smith offered some assurances on the earnings growth dynamic Wednesday night. “It starts with topline. We hope to continue to see those transactions grow, and we are optimistic there. We’ve got the right plan in place that [Niccol has] outlined. And then over time, earnings are going to lag. So, we’ve said that you grow topline first, and then the earnings will follow. We are taking all the necessary actions now, though, to make sure that every single transaction is more profitable going forward, and that’s where I would leave it for now.” On that note, Starbucks closed 627 stores in the quarter as part of its restructuring plan announced in September; the vast majority were in the U.S. or Canada. During the conference call, Smith explained these stores didn’t fit the company’s standard for customer experience, and many weren’t making money. The result of these closures will reduce North America’s revenue but contribute a slightly positive impact to operating margins. (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. 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