Starbucks Corporation (SBUX) has been brewing up lately, with its stock appreciating over 24% in the past month. But what’s fueling this caffeinated surge, and is it a good time for investors to jump in?
The Brian Niccol Effect
The recent rally was ignited by the announcement that Brian Niccol, currently CEO of Chipotle Mexican Grill Inc. (CMG), will take over as Starbucks’ new chief executive on September 9. This news came after a challenging period for the coffee retailer under the leadership of Laxman Narasimhan.
Narasimhan's tenure saw a dip in same-store sales in the U.S., complaints about store staffing and long wait times, and increased competition in China. His strategy of focusing on non-coffee drinks and technology improvements diverged from former CEO Howard Schultz’s emphasis on coffee and customer experience, contributing to his departure.
Moreover, this leadership change has been met with enthusiasm by investors, causing the stock to jump 23% on August 13. Niccol is seen as a game-changer for Starbucks. Under his leadership, Chipotle managed to bounce back from food safety issues and maintain strong sales. His knack for integrating technology, automation, and improving customer experiences is just what Starbucks needs right now.
Niccol’s experience with streamlining operations and enhancing customer engagement could help address SBUX’s current issues, from fixing staffing problems to speeding up service. While it's still early to see the impact of Niccol’s leadership, his track record suggests that Starbucks might be in good hands. Given his success at Chipotle and his focus on technology and efficiency, there’s a lot of hope that he could turn things around for Starbucks.
Starbucks' Financial Resilience and Turnaround Efforts
Starbucks may have hit some rough patches recently, but it's still brewing a solid business with robust fundamentals. Despite a dip in sales, it continues to build a loyal customer base that keeps the coffee flowing. In the fiscal third quarter, SBUX's rewards program grew to 33.8 million active members in the United States, indicating a 7% increase year-over-year and 3% sequentially. This growing membership translates to $1.8 billion in deferred revenue on Starbucks payment cards as of June 30, effectively giving the company a handy interest-free loan.
However, the retailer struggled in its major markets: the U.S. and China. In the U.S., same-store sales dipped 2% compared to a 7% increase the previous year. Store traffic fell by 6%, though the average ticket price rose by 4%.
Moreover, due to the competitive landscape and cautious consumer spending in the Chinese market, its comparable-store sales plummeted 14%, down from a 46% increase last year, with both traffic and average ticket price dropping by 7%. However, Starbucks’ Rewards program in China grew by 1.6 million, reaching a record 22 million active members.
Overall, SBUX’s revenue dipped 1% to $9.11 billion, with global comparable-store sales falling by 3%. The company expanded its footprint by opening 526 new stores, ending the quarter with a total of 39,477 locations. The company reported a net income of $1.05 billion, or $0.93 per share, compared to $1.14 billion, or $0.99 per share, from the same period last year.
While these figures could disappoint some investors, Starbucks is brewing up a comeback with a three-part action plan designed to revitalize its business. First, the company is fine-tuning store operations to meet new demand, which includes improving partner scheduling, turnover, and inventory management across nearly 10,000 U.S. stores. New systems, like the Siren Craft, are already showing positive results, helping to speed up service and enhance performance metrics. Starbucks is also accelerating new store openings and renovations in key growth markets to drive expansion.
Moreover, in response to China’s wobbling economy, where competitors are aggressively undercutting prices, Starbucks is exploring ‘strategic partnerships’ to stay competitive. Meanwhile, activist investor Elliott Investment Management’s involvement could potentially push for significant changes like a slower investment pace in China, more aggressive share buybacks, or a faster rollout of new systems. BTIG analyst Peter Saleh believes Elliott’s involvement with Starbucks could accelerate ‘bigger changes’ and impact SBUX’s market strategy.
Additionally, Starbucks is focusing on faster service through new espresso machines and software updates and capitalizing on successful product launches like the Summer-Berry Refreshers. The company also plans to open dozens of delivery-only kitchens in the U.S. and is eyeing growth in smaller cities and suburban areas. With these moves, the retailer aims to boost customer engagement and drive growth, making its stock an exciting option for investors watching its turnaround.
Bottom line
While analysts expect Starbucks to show little to no sales growth this year, expectations are for a return to high-single-digit growth in the future. For the fiscal year ending September 2026, Wall Street forecasts its revenue and EPS to grow by 7.2% and 11.7% year-over-year, respectively.
In terms of valuation, with a forward non-GAAP P/E ratio of 26.55, the stock remains reasonably valued for such a renowned brand. Although it isn't a bargain as it was a month ago, long-term investors might still find it attractive, especially with potential interest rate cuts on the horizon. With Federal Reserve Chair Jerome Powell signaling the likelihood of lower rates, Starbucks could benefit from a favorable economic environment, making it a stock worth considering for those looking to invest in its potential turnaround.
