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Starbucks (SBUX) delivered a better-than-expected first-quarter financial performance, signaling that its turnaround strategies are beginning to gain traction. Despite facing headwinds from consumer boycotts, a shift toward lower-priced beverages, increased competition in China, and pricing concerns, the coffee giant’s efforts to stabilize its business and reconnect with customers appear to be paying off.
Starbucks Delivered Improved Same-Store Sales
One key measure of the company’s progress is its same-store sales performance, which declined by 4% compared to the same period last year. While a dip in sales is concerning, this was a significant improvement from the 7% drop in the previous quarter and its total revenue came in better than analysts' predictions.
In the U.S. market, same-store sales also fell by 4% during the quarter. Although transactions were down by 8%, customers spent more per visit, indicating that strategic pricing adjustments are working. Notably, Starbucks is scaling back discount-driven promotions, resulting in 40% fewer discounted transactions than the previous year. The company also eliminated extra charges for nondairy milk customizations, which resonated well with customers.
These changes contributed to a positive shift in Starbucks’ sales mix, with coffee and espresso-based beverages outperforming expectations. While holiday promotions underdelivered, the robust performance of core beverages helped cushion the impact.
The company's “Back to Starbucks” initiatives launched in the fiscal first quarter have started to bear fruit. Non-Starbucks Rewards customer traffic increased quarter over quarter, while membership and spending within the Starbucks Rewards program grew sequentially and year over year. The return of lapsed Rewards members, driven in part by the pricing parity for nondairy milk options, underscores the effectiveness of the company’s renewed focus on customer engagement.
Moreover, Starbucks regained category share in Q1 after two quarters of decline. This recovery suggests that the company’s strategic efforts are resonating with customers and reaffirming its brand strength.
Overall, Starbucks’ Q1 performance signals a positive start, implying that the company is well-positioned for future growth. Let’s take a closer look.
Factors to Reaccelerate Starbucks’ Growth
Looking forward, Starbucks is taking a multifaceted approach to reaccelerate its growth. The company is simplifying its menu to improve consistency, drive customer satisfaction, and enhance operational efficiency. As part of this effort, Starbucks plans to reduce its beverage and food items by approximately 30% by the end of fiscal year 2025. This streamlined menu is expected to better reflect the company’s premium positioning.
The company is leveraging technology to improve order sequencing and efficiency behind the counter. Moreover, the enhancements to the Starbucks app and plans to deploy digital menu boards across its U.S. company-owned stores over the next 18 months will likely support traffic and overall growth.
Starbucks is doubling down on store renovations, new builds, and strategic closures to expand its footprint and strengthen sales. Starbucks’ comprehensive approach aims to maximize the potential of its U.S. market while optimizing its store portfolio.
Moreover, it continues focusing on driving efficiency across the company. Starbucks saw meaningful efficiency gains during the first quarter driven by its focus on the “Back to Starbucks” strategy. Improved partner stability within stores and enhanced in-store productivity supported its margins. Starbucks optimized its supply chain rates outside the stores, resulting in impressive sourcing efficiencies. These combined efforts delivered savings of approximately 150 basis points during the quarter.
Looking ahead, Starbucks’ focus on generating additional operational efficiencies will likely support its ongoing transformation efforts and cushion its bottom line.
On the international front, Starbucks is doubling down on stabilizing and fortifying its business while exploring growth opportunities in China, a crucial growth market. Further, the company continues to see promising expansion prospects in key regions such as Japan, South Korea, and Italy.
Long-Term Growth and Earnings Outlook
While the company’s elevated investments may exert pressure on earnings in the short term, Starbucks anticipates a recovery in earnings per share (EPS) in the latter half of fiscal 2025. As these investments begin to pay off, sequential and year-over-year EPS growth is expected, positioning the coffee giant for sustainable long-term growth.
Starbucks’ ongoing investments in pricing transparency, marketing efficiency, and product innovation will likely support its growth.
Wall Street has a “Moderate Buy” consensus rating on Starbucks stock as the setup has started to look more positive.
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On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.