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Shares of this well-known consumer brand are significantly off their peak.
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Starbucks (SBUX +0.00%) is without a doubt one of the strongest consumer brands on the face of the planet. The business has a presence in 88 markets around the globe. And it's been leading the industry with its premium offerings.
However, this coffee stock hasn't panned out for investors in recent times. As of Aug. 25, it trades 32% below its peak, which was established in July 2021. Contrarian investors who believe there's an opportunity here might be ready to bet on Starbucks. But before making a move, here are three things to learn about the business.
Image source: Starbucks.
During the fiscal 2025 third quarter (ended June 29), Starbucks exceeded Wall Street estimates, at least on the top line. Revenue totaled $9.5 billion. Diluted earnings per share (EPS) came in at $0.49, down an alarming 47%, driven by higher operating expenses across the board.
Perhaps the most notable data point was that the company reported a drop in same-store sales (also known as comparable sales, or comps) of 2%; this was the sixth straight quarter that Starbucks revealed a decline. That's certainly an alarming trend. Comparable sales is one of the most critical metrics for any restaurant chain or retailer, measuring productivity growth of each existing location.
In the U.S., which has 17,230 stores, comps fell by 2%. In China, which has 7,828 stores, comps were actually up 2%, a positive development.
Before comparable sales started to fall, Starbucks was heading in the right direction. Between fiscal 2018 and fiscal 2023, its same-store sales increased at a compound annual growth rate of 4.7%, even including a 14% hit due to the pandemic in fiscal 2020.
In September 2024, the company made headlines when it hired former Chipotle Mexican Grill CEO Brian Niccol to take the top job at the coffeehouse chain. Starbucks had been struggling with weaker foot traffic and changing customer perceptions. Niccol had a very successful run leading the Tex-Mex fast-casual pioneer, and the hope was that he could bring some of his industry magic to Starbucks.
The business is now in the middle of a major turnaround plan. One of Niccol's top priorities includes helping store employees, or "green apron partners," to better do their jobs. In an initiative known as Green Apron Service, Starbucks will focus intensely on improving the customer experience at its locations.
The CEO's other actions included simplifying the menu, enhancing stores to bring back the "third place" feeling, and getting rid of discounts and promotional activity. "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," Niccol said.
Investors need to be patient here. Turnarounds are very difficult, and one of this magnitude could take some time. It's best to temper expectations until comparable sales and EPS start growing again.
Starbucks has had a presence in China for decades; as mentioned, it has nearly 8,000 stores in the country. But it has been challenged, even though transaction counts were up 6% in Q3. Competition is fierce, particularly from lower-priced rivals that provide greater value to consumers.
Starbucks is looking for a strategic partner to take a stake in the company's Chinese operations. Niccol said that there have been over 20 interested parties so far. It looks like Starbucks wants to take a capital-light approach, with added flexibility and help from a partner with more knowledge about the local market. Anonymous sources in a CNBC article estimated that the China segment is worth $10 billion, roughly 10% of the company's entire market cap.
It will be interesting to see how this plays out. Nonetheless, Niccol believes "there's going to be thousands ... more Starbucks in China."
Starbucks is going through a difficult stretch in its history. But prospective and current investors are now more informed about comparable-sales declines, the ongoing turnaround, and changes coming in China.
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