Starbucks Faces Trouble as CEO Touts 'Turnaround'

I'll be honest with you. I get a chuckle out of people who wait in line for Starbucks SBUX. Especially if there is a 7-Eleven or a Dunkin' Donuts nearby. That said, I am rarely the norm, and just because I don't drink the coffee, does not mean I won't buy the stock. If there is a reason, that is, and there has not been a good reason for a very long time. Let's dig in.

The firm went out and hired Brian Niccol who had done such a good job as chief executive at Chipotle Mexican Grill CMG in August 2024 to be named the new CEO. Burritos for the masses might not seem like a logical stepping-stone toward high-end coffee, but that's not it. "It" is about running a food services business at scale efficiently. Niccol can do that. Prior to running Chipotle for six years, he had been CEO of the Taco Bell division of Yum! Brands YUM and before that, chief marketing office for Yum's Pizza Hut.

Brian Niccol

So, what does the CEO want to tell investors? 

He commented in the press release, “We've fixed a lot and done the hard work on the hard things to build a strong operating foundation, and based on my experience of turnarounds, we are ahead of schedule." 

He's also looking ahead: “In 2026, we'll unleash a wave of innovation that fuels growth, elevates customer service and ensures everyone experiences the very best of Starbucks. We're building back a better Starbucks experience and a better business."

The Quarter

Global comp store sales decreased by 2%, which was actually better than expected. This result was driven by a 1% increase in average ticket more than offset by a 3% drop in total transactions. For the three-month period ended June 29, Starbucks posted an adjusted EPS of $0.50 (GAAP EPS: $0.49) on revenue of $9.456 billion. 

The top-line result just beat Wall Street's expectations while sporting year-over-year growth of 3.8%. However, the adjusted bottom line print fell significantly short of what Wall Street was looking for. North American same store sales dropped 2% while international same store sales printed flat from a year ago. The chain opened 308 new stores during the quarter. Globally, 53% of Starbucks locations are company-owned, the rest are franchised. Operating margin contracted 680 basis points due to the firm's deleveraging and investment in its "Back to Starbucks" campaign.

Operations

As revenue was growing 3.8%, total operating expenses increased 11.8% to $8.578 billion. Product and distribution costs were up 7.8%, store operating expenses were up 13.5%, depreciation and amortization expenses were up 12.4%. This left a GAAP operating income of $935.6 million (-38.3%) as operating margin dropped from 16.7% to 9.9%.

After accounting for interest, other income and expenses and taxes, GAAP net income attributable to shareholders printed at $558.3 million (-47.1%). This works out to $0.49 per share, which compares poorly to the year ago comp of $0.93.

Segment Performance

• North America generated revenue of $6.927 billion (+1.6%), which produced an operating income of $918.7 million (-35.9%) as operating margin dropped from 21% to 13.3%
• International generated revenue of $2.011 billion (+9.2%), which produced an operating income of $272.7 million (-5.1%) as operating margin dropped from 15.6% to 13.6%
• Channel Development generated revenue of $438.8 million (+10.4%), which produced an operating income of $218.4 million (-7.1%) as operating margin dropped from 53.7% to 45.1%

Guidance

The firm did not issue any guidance going forward. However, during the conference call, in regard to the Chinese business, Niccol made mention that the firm was looking for a local in-country partner. 

On that, the CEO said, "We've received significant interest from more than 20 interested parties, and we're evaluating options. We remain committed to our China business and want to retain a meaningful stake."

In response to a question late in the call, Niccol said, "I think there's no reason why this can't be one of the best businesses in China. And so, we're looking for a partner that shares that passion and shares that belief that there's this opportunity to grow one of the special brands in China. And we think having somebody that's a local partner sets us up to ensure that is the case for the Starbucks brand long term." 

I think the possibility of an investment from abroad was the reason for the overnight strength before the sellers showed up for the regular session.

The Chart​

I find this chart somewhat troubling. Readers will see an uptrend illustrated here by a Raff regression model. that has been in place since early April. ​The stock has hit stiff resistance at the same spot on the chart three times since the start of July. On Wednesday morning, the shares are threatening to break below the lower trendline of the model which also happens to be the stock's 50-day SMA.

Should the stock lose its 50-day SMA, portfolio managers will be forced to reduce long-side exposure by their risk managers. Should that line hold, that would mean that professional managers have more or less decided to defend that line. Therefore, as a word of caution to the readership, I would not initiate or add to any long-side positions in SBUX until we know if the 50-day SMA has been defended. Currently the daily MACD is postured bearishly across all three components.

At the time of publication, Guilfoyle had no positions in any securities mentioned.