Sales and profits fell sharply in the fourth quarter. Here’s what it means for the turnaround.
Investors in Starbucks (SBUX 0.17%) knew that the arrival of Brian Niccol, the former star CEO of Chipotle, in the corner office wouldn’t magically fix the business. Still, they were unprepared for how bad Starbucks’ performance was in the fiscal fourth quarter, which ended Sept. 29.
The coffee chain dumped its preliminary results on investors a week earlier, clearing the air before the full report next Wednesday. The stock fell 4.2% after hours on Tuesday as the numbers were ugly across the board.
Comparable-store sales (comps) fell 7% globally and were down 6% in the U.S. on a 10% decline in comparable transactions. Its collapse in China continued as well with comps down 14% in its No. 2 market.
Overall revenue fell 3% to $9.1 billion, missing the consensus at $9.38 billion. Its bottom-line results were also woeful, as adjusted earnings per share dropped 24% to $0.80, also well below estimates at $1.03.
Management didn’t make excuses, acknowledging that investments in expanded product offerings, in-app promotions, and integrated marketing didn’t “improve customer behaviors.” It also said that traffic among both Starbucks Rewards and non-Rewards customers was weak.
Meanwhile, in China, it faulted intensifying competition and a weak macro environment for the poor performance.
Starbucks also pulled its guidance for fiscal 2025, a sign that the recovery may take longer and is more uncertain than expected. Management said that the move “will allow ample opportunity to complete an assessment of the business and solidify key strategies.”
That statement indicates that fiscal 2025 could be a lost year for Starbucks as well, and based on the fourth-quarter results, investors should expect continued headwinds through at least the first half of fiscal 2025.
Image source: Getty Images.
Is the turnaround in jeopardy?
Starbucks surged 24.5% when Niccol was announced as the new CEO, a credit to his success with Chipotle. It’s rare to see a stock jump so much on a CEO change, but Starbucks has been struggling for several quarters, and investors are hopeful that Niccol can repeat the performance he achieved at Chipotle, which was struggling in the aftermath of the E. coli outbreak.
However, Starbucks seems to be more structurally challenged than Chipotle was when Niccol took over the burrito chain, and it’s a more complex, global business.
He addressed investors in a brief video that accompanied the report, reasserting his commitment to fixing the U.S. business, which includes giving baristas the support that they need, simplifying the menu, streamlining the order and pickup process, appealing to both Rewards and non-Rewards members, and getting back to the coffeehouse atmosphere the brand is known for.
Niccol plans to provide more details on the earnings call next week, but the weak results and the decision to pull guidance show that the turnaround effort hasn’t really started. The new Starbucks CEO said he has spent his first weeks visiting stores and talking to employees and customers, and he unveiled his Back to Starbucks plan shortly after he started the job.
The company also made the surprising move of raising its quarterly dividend from $0.57 a share to $0.61, which it said signaled confidence in the business, even though it is clear that cash flow is moving in the wrong direction.
Starbucks is still a risky bet
The stock is still at roughly where it finished after Niccol was named the CEO, meaning it trades at a premium based entirely on expectations that he can restore the brand.
In other words, in order for the stock to be a winner from here, Starbucks now has to exceed the significantly elevated expectations that it has compared to where it was before Niccol entered the scene.
He deserves investor trust and the time to implement his strategy, but the preliminary results are a reminder that Starbucks’ business is moving rapidly in the wrong direction. The stock deserves to be down on the news, but it would likely be down a lot more without the goodwill from investors that Niccol has earned.
Jeremy Bowman has positions in Chipotle Mexican Grill and Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.