Is coffee leader Starbucks (SBUX 1.34%) in the midst of a recovery? The market thinks so. Starbucks stock jumped after earnings last week, and it was up 16% over the past year, despite falling sales and sagging earnings.
There's been some progress, and investors are picking up on that. They also have confidence in new CEO Brian Niccol, who's been at the helm about five months.
Is now the right time to buy? There are a lot of factors to consider. Let's go through them.
Making coffee great
Starbucks has been through a whirlwind of ups, downs, and CEOs over the past few years. Once seen as a reliable winner, the company has been through severe challenges, and it hasn't managed well through all of them.
This isn't the first time Starbucks has been on the brink of disaster. It has reinvented itself successfully in the past, and it's trying to do that again. Part of the new plan is digging into those principles that helped Starbucks emerge as a bigger and better player before, and using them to its advantage again.
NASDAQ: SBUX
Key Data Points
Niccol has noted that the company strayed from these roots, which are based on the idea that Starbucks is a premium coffee retailer and a gathering place. There are two sides to being premium: Charging the high prices Starbucks is known for, and making it worth it. It's fallen in both of these areas, becoming too promotional and not providing the experience its customers expect.
Niccol is aiming to address all these factors with a reinvention plan, and Starbucks is making some progress. The company has curbed the promotional activity and also added more value to recreate a superior experience, like taking off the added charge for non-dairy milk and reintroducing self-serve kiosks.
A major part of the plan is tweaking the process through data analysis and technology to commit to the "4-minute cup of coffee." That's where management is investing, and it's taking many different measures to make it a smooth and simple process. These include adding staff in high-volume locations, changing its sequencing model, and more.
What it boils down to is operations, where Niccol is a star. He introduced many of the processes that made Chipotle Mexican Grill so popular when he was CEO, and that's where he's putting his focus at Starbucks. The better Starbucks gets at the process, the more it will improve the customer experience, and that should trickle down to higher sales and earnings.
A not-so-great first quarter
Revenue was flat year over year in the 2025 fiscal first quarter (ended Dec. 29, 2024). Comparable sales were down 4%, with a 6% decrease in transactions partially offset by a 3% increase in average ticket. Earnings per share (EPS) fell 23% to $0.69.
As mediocre as that sounds, it beat Wall Street's expectations, which generated market enthusiasm. Management also said that trends improved throughout the quarter, and that it was most felt with the morning customer, the customer that the company is working hard to bring back.
All in all, the market is confident in Niccol's plans and ability to effect the change Starbucks needs right now.
The dividend can perk you up
Starbucks has been a great dividend stock for a long time, and it was one of those great stocks that offered growth and income. Even if the growth part is questionable at this time, the dividend is still fantastic.
At the current price, it yields 2.1%, which is more than the S&P 500 average of 1.3%. It's also fast-growing, increasing 280% over the past 10 years. Management reiterated its commitment to the dividend in the first quarter.
Complicated coffee
If you already own Starbucks stock, you should probably hold on. There's a light at the end of the tunnel. If you're considering buying Starbucks stock, you might be excited about its turnaround potential. It's definitely there, and that turnaround might happen soon. On the other hand, lots of investors have become excited, and Starbucks stock isn't cheap. It trades at a price-to-earnings ratio of 35, which isn't a bargain when Starbucks is still on the decline.
If you are looking for an excellent dividend stock that's reliable for growth and payments, Starbucks could fit the bill. But if you're looking for a bargain, I don't think Starbucks qualifies right now. There could be volatility ahead as Starbucks regains its footing. In the long term, it's likely to get there, but new investors might want to stay on the fence for the time being.
