Shares of Starbucks (SBUX 0.79%) appear to have steadied despite the coffeehouse operator reporting declining same-store sales recently. Investors were encouraged by some recent partnerships the company has forged, along with hopes that a turnaround in the business is underway. The stock is nonetheless still down more than 20% year to date.
Let's take a closer look at the company's recent results and see if a turnaround might be coming.
China and the U.S. remain weak
Accounting for the majority of Starbuck locations, the U.S. and China remain the company's most important markets. Both, however, continued to struggle in its fiscal third quarter. In the U.S., Starbucks saw its same-store sales fall 2% compared to a 7% increase a year ago. Traffic to its stores fell by 6%, while the average ticket price increased by 4%.
In China, comparable-store sales dropped by 14% compared to a 46% increase a year ago. Traffic to its stores and the average ticket dropped by 7% each. Starbucks is being pressured in the country by cautious consumer spending, as well as intense competition and a price war in the space. On a positive note, Starbucks Rewards members in China increased by 1.6 million to a record 22 million active members.
Overall revenue declined by 1% to $9.1 billion, with global comparable-store sales falling by 3%. Starbucks opened 526 net new stores in the period, ending the quarter with 39,477 locations. Adjusted earnings per share (EPS) declined by 7% to $0.93.
Image source: Getty Images
There's a turnaround plan
On its earnings call, management said that it was seeing "green shoots" in the U.S., thanks to the action plan it implemented to help turn around the business.
Starbucks said it's had big improvements in scheduling, employee turnover, and inventory management. It has also started to reduce wait times, helped by the introduction of phase 1 of its Siren Craft System. It said early indications are that Siren could reduce wait times by 10 to 20 seconds, which could lead to a 1% to 1.5% lift in comparable-store sales.
The company said it also hopes to accelerate the pace of new store builds and remodels. Its focus will largely be on tier 2 and tier 3 cities that are seeing population growth. It's also expanding its partnership with delivery company Gopuff to open 100 delivery-only kitchens across the U.S.
On the product side, the company said the launch of its Summer-Berry Starbucks Refreshers beverages with pearls had the biggest first-week sales in its history, and helped its entire Refreshers lineup. In October, it plans to launch its Milano Duetto whole-bean coffee globally.
In China, the company said it's in the "early stages of exploring strategic partnerships to further enhance our competitive position to accelerate growth." It said it will continue to be a premium brand in the country and it believes the long-term opportunities in China remain significant.
Starbucks also confirmed that Elliott Investment Management has taken a stake in the company and that the two have had constructive talks.
Is it time to buy the stock?
Starbucks' fiscal Q3 results by themselves were certainly not something to get excited about, with the U.S. and China both continuing to struggle. However, the company does seem to be making some progress implementing its turnaround plan in the U.S. If that's successful, it should start to positively impact results.
But China will likely take longer to fix, given the aggressive coffee price war going on there. China remains a potential long-term growth story with a lot of expansion opportunities, but it also offers some of the biggest risks the stock faces.
Starbucks shares now trade at a forward price-to-earnings (P/E) ratio of about 19, based on analyst estimates for its fiscal year 2025. That's not outrageous for an iconic brand that still has a lot of expansion opportunities ahead.
SBUX PE Ratio (Forward 1y) data by YCharts.
While I think that China is likely to remain a drag for some time, I'm encouraged by some of the early progress the company is making in the U.S. And I'm a fan of Elliott Management getting involved. The activist fund has a very good track record of investing in businesses that are floundering and in need of a turnaround.
Given that, I would pick up shares ahead of what I think could be a nice turnaround for the company.
