Starbucks: A Pale Rose of Recovery

by

The curious case of Starbucks (SBUX +0.33%) – a purveyor of meticulously calibrated bitterness, if you will – has been unfolding with a certain predictable unpredictability. The recent fiscal first-quarter report, a document brimming with the usual corporate panoply of percentages and projections, suggests a tentative stirring, a faint blush upon the cheeks of a once-robust, now somewhat wan, enterprise. One observes a run, yes, a veritable dash towards… something. But what precisely does this momentum portend? Is it merely a fleeting spasm, a caffeinated twitch, or a genuine resuscitation?

For those investors burdened with the anxieties of a turnaround – a rather pedestrian term, don’t you think, for the intricate dance of resuscitation and reinvention? – Wednesday’s pronouncements offered a momentary reprieve. Comparable store sales, those meticulously tallied measures of consumer indulgence, did, indeed, accelerate. And, most delightfully, a return to positive traffic trends in the American heartland. A small victory, perhaps, but one savored all the more for its scarcity.

Mr. Brian Niccol, the company’s chief executive – a man whose pronouncements, one suspects, are carefully curated to resemble both optimism and pragmatism – declared the “Back to Starbucks” strategy to be “working” and “ahead of schedule.” A pronouncement delivered with the practiced cadence of a seasoned conjurer, wouldn’t you agree? One half expects a rabbit to materialize from the quarterly report.

A Shifting of the Grounds

By the close of fiscal 2025, even the most jaded observer could detect a subtle amelioration in Starbucks’ fortunes. Revenue, in the fourth fiscal quarter, crept upward by 5%, a modest ascent, but an ascent nonetheless. A marked improvement, considering the earlier, more languid growth rates. The second fiscal quarter, for instance, yielded a mere 2% increase, a figure that whispered of stagnation. And the full fiscal year 2024, a dismal 1%. One begins to perceive a pattern, a slow, deliberate unwinding of past missteps.

But the true inflection point, the moment when the trajectory subtly altered, lies within the comparable store sales metric. A rather prosaic term, admittedly, for a measure that encapsulates the very essence of consumer desire. In the first fiscal quarter, these sales rose by 4%, a discernible acceleration from the previous quarter’s anemic 1% growth. A pleasing symmetry, wouldn’t you say?

Equally encouraging is the performance within the United States, Starbucks’ domestic domain. Comparable store sales here rose by 4%, a figure that represents a welcome departure from the flat performance of the previous quarter. Behind this modest increase lies a more nuanced story: a 3% rise in comparable transactions and a 1% increase in the average ticket price. This suggests, quite elegantly, that traffic is returning to the stores, that consumers are once again succumbing to the siren song of the Frappuccino. A small triumph, to be sure, but one that speaks volumes about the company’s ability to adapt and reinvent itself.

This subtle shift in fortunes translated into robust overall fiscal first-quarter results, with revenue rising by 6% to $9.9 billion. A figure that, while impressive, should be viewed with a certain degree of skepticism. Numbers, after all, are merely the scaffolding upon which narratives are constructed.

However, earnings per share fell by a rather precipitous 62%, a consequence of the company’s investments in its turnaround plans and the unfavorable impact of tariffs and elevated coffee pricing. A cautionary tale, perhaps, about the perils of pursuing ambitious goals without a corresponding increase in profitability.

The Alchemy of Reinvention

Ultimately, these results suggest that the Starbucks restructuring effort is, indeed, bearing fruit. As Ms. Cathy Smith, the company’s chief financial officer, explained, the company now has a “clear line of sight” to translating topline strength into sustainable earnings growth. A rather elegant phrase, wouldn’t you agree? One that suggests a meticulous understanding of the forces at play.

Importantly, management has provided concrete evidence to support this optimistic assessment. Comparable store sales trends, they claim, have remained strong in January. And they are projecting comparable store sales growth of “3% or greater” both globally and in the United States. Furthermore, they anticipate a similar growth rate for total revenue, even as they open 600 to 650 new coffeehouses. A rather ambitious undertaking, to be sure, but one that speaks to the company’s unwavering commitment to growth.

Loading widget...

However, one cannot help but wonder whether these impressive results have already been priced into the stock. After all, Starbucks’ forward price-to-earnings ratio is currently hovering around 40. This suggests that investors are already anticipating robust single-digit revenue growth and a significant expansion in the company’s operating margin. A rather optimistic assessment, wouldn’t you agree? One that leaves little room for error.

While the fiscal first-quarter results clearly demonstrate that Starbucks’ turnaround efforts are gaining traction, one remains skeptical of the stock’s current valuation. The market, it seems, has already factored in the success of the “Back to Starbucks” plan. A rather dangerous game, wouldn’t you agree? One that could leave investors vulnerable to a sharp correction.

For those investors interested in the stock, the best course of action, for now, may be to tune in to the company’s Investor Day presentation tomorrow. Perhaps management will articulate a clear path back to consistent double-digit earnings-per-share growth. Without such a profile, the stock should probably be avoided – at least at its current valuation. A rather prudent approach, wouldn’t you agree? One that prioritizes long-term value over short-term gains.

Read More

2026-01-28 23:13