Starbucks Shares Jump On Signs Of A Turnaround. Is It Too Late To Buy The Stock?

Starbucks (NASDAQ: SBUX) shares got a boost following its fiscal Q1 earnings as CEO Brian Niccol continues to implement his turnaround plan. While its results topped analyst expectations, the coffee house operator is still seeing same-store sales and traffic declines.

Let's take a closer look at Starbuck's most-recent results and turnaround progress to see whether or not it's too late to buy the stock.

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Same-store sales continue to decline

For the fourth-straight quarter, Starbucks' same-store sales declined. This is a key retail and restaurant metric that shows how established store locations are performing.

The company's overall same-store sales dropped by 4% in the quarter, with a 6% decline in traffic and a 3% increase in average ticket size. That was better than the 5.5% decline in comparable-store sales that analyst were expecting, according to StreetAccount estimates.

In North America, its comparable-store sales fell 4%, with traffic down 8%. International same-store sales, meanwhile, also fell 4%, with traffic down 2% and its change in ticket down 2%. Its second-largest market, China, saw a 6% drop in same-store sales, with a 4% decline in average ticket and 2% lower traffic.

Overall revenue came in at $9.4 billion, which was basically unchanged from a year ago. That topped analyst expectations of revenue of $9.3 billion, as compiled by LSEG.

While adjusted earnings per share (EPS) of $0.69 topped the $0.67 analyst consensus, that was a 23% drop from a year ago. Starbucks saw a 390 basis-point decline in its operating margin to 11.9% as it invested in employees and stopped charging extra for nonmilk alternatives.

Niccol continues with his plan to help turn around the company. This has included reducing discounted offers; however, the company has nearly doubled its marketing spend as a percentage of revenue as it embarks on a new advertising campaign focused on highlighting the Starbucks experience. At the same time, it has been investing in its employees as well, adding additional coverage hours to help support lower wait times as well as increasing wages and benefits. It said this accounted for 180 basis points of margin pressure in North America.

In addition, Starbucks plans to reduce its number of food and beverage menu items by 30% by the end of the year. However, it still plans to innovate in both the food and beverage categories and to react to changing consumer preferences.

And while there may appear to be a Starbucks on every corner, the company sees an opportunity to double its number of stores in the U.S. Meanwhile, it will continue to explore strategic partnerships to grow in China.

While the company did not provide any official guidance, it said that EPS will be lowest in fiscal Q2 due to seasonality and elevated investments. It then expects EPS to improve in the second half both sequentially and year over year.

Is Starbucks' stock a buy?

Niccol's turnaround plans are still in the early stages, so it's difficult to discern how much of a positive impact they are having, if any. Same-store sales are still declining, which is leading to operating deleverage, causing profits to fall even further.

One tough decision he made that the last management team refused to address was employee hours. The company had become too lean on staffing, which Niccol appears to be addressing. However, adding more baristas adds more costs, which leads to lower operating margins. It is a trade-off I think that needed to be made. However, I think Niccol's reputation is largely behind why he was able to do this without it hurting the stock. I think under old management the stock would have likely taken it on the chin.

Moving forward, though, Starbucks still needs to get traffic to return. We'll have to see if investing in its image and brand marketing will help with this. The company is also cutting menu items. While Chipotle, where Niccol was CEO previously, has always had a slim menu with great success, Starbucks fans have long been known for wanting to create their own concoctions. As such, we'll have to see how this plays out.

Turning to valuation, the stock has a forward price-to-earnings (P/E) ratio of about 36 based on fiscal 2025 analyst estimates and 29.4 fiscal 2026.

SBUX PE Ratio (Forward) data by YCharts

Overall, I think Starbucks' valuation may be a little ahead of itself at the moment. I think Niccol made the first right move adding more labor hours, but that was the easy part. Bringing back more casual customers will be tougher. Consumers have generally seen value in Chipotle over the years, even if the costs may be higher than the average quick service restaurant chain , but I don't think the same can be said with Starbucks.

As such, I'd prefer to wait on the sidelines after a nice run in the stock.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.