How Bold Are Starbucks’ Change Bets?

Titan coffee chain starbucks (NASDAQ: SBUX) just released a preliminary report for the fourth quarter of 2024. Sales are coming in below expectations due to fewer (but more profitable) transactions. Foodservice turnaround expert Brian Niccol’s newly installed management team scrapped its full-year guidance targets and said there will be no firm financial targets for the next fiscal year.

At the same time, CFO Rachel Ruggeri noted that a turnaround plan that includes some cost-cutting moves is already underway, and will be explained in more detail in next week’s full earnings report.

So Starbucks is going back to the basics of running a coffee shop. While we wait for a fuller overview next week, we’ll see what’s new in the company’s preliminary report.

Decrease in sales and strategic changes

Starbucks saw same-store sales fall 7% year over year globally. The large and important Chinese market showed a deeper same-store sales decline of 14% amid stronger competition and a weakening Chinese consumer market. In North America, comparable store foot traffic decreased 10%, while the average ticker price increased 4%. Overall, Starbucks’ total sales fell 3% and earnings fell 24.5% below last year’s record.

Niccol’s commentary for this first look at fourth-quarter results didn’t provide much commentary on financial results. Instead, he focused on the turnaround effort and what Starbucks is doing to get back on track.

This isn’t exactly rocket surgery, but a simple return to what made Starbucks great once upon a time. The marketing plan used to focus on members of the Starbucks Rewards loyalty program, but is now targeting the general coffee-drinking population more broadly. Niccol is simplifying the menu and making product prices more consistent across product lines.

“If you stay true to your core identity, take care of your customers and your team, simplify the business, deliver consistently high-quality products and experiences, and tell your story effectively, you will succeed,” Niccol said in a short video of prepared comments. “So we have a lot of work ahead of us, but I’m sure we can do all these things well at Starbucks.”

Fixing the menu and focusing on the customer experience “will remind people why they love Starbucks,” Niccol said. This should motivate them to visit the store more often, reviving Starbucks’ fading business growth. Damaged brand moat can be repaired.

Image source: Getty Images.

Brian Niccol’s Impact on Starbucks Investment

I like Niccol’s brand building mentality. It also comes with an excellent pedigree of successful changes to Chipotle Mexican Grill and two yum! Brands divisions This superstar gives Starbucks a serious shot at igniting its stagnant growth. In particular, I think it’s the right decision to preach a little less at the heart of the Starbucks Lover Loyalty Program. Reaching new groups of potential customers could solve your store’s traffic problem in a hurry.

However, this change effort does not occur in a vacuum. Rival of fresh cut coffee Dutch brothers (NYSE: BROS) has seen uneven same-store revenue growth in recent quarters and Keurig Dr. Pepper (NASDAQ: KDP) described the U.S. coffee market as “muted” in its second-quarter earnings call. So the stage isn’t set for a triumphant rebound as Starbucks must fight for its brand value in a challenging economy.

On the upside, the inflationary crisis fades. Consumer confidence is still quite weak, but this leaves room for significant improvement. On that note, I’m watching Starbucks’ turnaround plan closely. The stock is down 15% in three years despite a big jump related to the hiring of Niccol. The legendary company is struggling, but it remains an ATM with a valuable brand and a chain of stores of global proportions.

I am tempted to buy a few shares of Starbucks at this critical time. However, the suspended financial guidance undermines my confidence in the company’s turnaround prospects. We wait until next week’s full earnings release. Waiting for a deeper understanding of the business plan makes more sense than rushing into a speculative investment.

For now, I’d give Starbucks a firm “hold” recommendation. Can Niccol reheat the coffee that went cold under the last management team? Wait and see, dear reader.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Dutch Bros and recommends the following options: short Dec 2024 $54 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.