Starbucks Surges on Earnings Beat, But Can Niccol’s Turnaround Keep Brewing Momentum?

Starbucks (SBUX) reported its fiscal first-quarter (Q1 FY25) earnings, delivering better-than-expected revenue and earnings per share (EPS), even as the company grapples with ongoing challenges in its turnaround strategy. The coffee giant posted revenue of $9.4 billion, essentially flat from the prior year but slightly ahead of analyst expectations. EPS came in at $0.69, down 23% year-over-year, but still surpassing estimates. Despite a fourth consecutive quarterly decline in comparable-store sales, early signs indicate that new CEO Brian Niccol’s "Back to Starbucks" strategy is beginning to take shape.

The company’s key performance metric, comparable-store sales, declined 4% globally, which was an improvement over the estimated 5.3% drop. North America and U.S. same-store sales also declined 4%, better than the forecasted 5.04% decline. International comparable-store sales also fell 4%, though this was ahead of the projected 6.1% drop. The company’s biggest market outside the U.S., China, reported a 6% decline in comparable sales, a notable beat against the expected 9.34% decline. These results suggest that while Starbucks is still facing headwinds, it is outperforming worst-case expectations.

Key Performance Metrics and Regional Breakdown

While same-store sales were negative across all regions, Starbucks managed to drive higher average ticket prices, which helped offset some of the transaction declines. Globally, the average ticket rose 3%, surpassing the 1.87% estimate. In North America, the average ticket was up 4%, above the 3% forecast. However, international markets saw a 2% decline in ticket size, slightly worse than the expected 1.25% drop.

Customer traffic remains a concern, with comparable transactions down 6% globally. North America saw an 8% drop, worse than expected, while China’s transactions declined just 2%, significantly better than the anticipated 5.67% drop. This suggests that while Starbucks is facing softness in demand, particularly in the U.S., China’s recovery could help support the company’s broader turnaround efforts.

The company opened 377 net new stores in the quarter, bringing its total to 40,576 locations worldwide. The U.S. and China now account for 61% of Starbucks’ global portfolio, with 17,049 U.S. stores and 7,685 in China.

Primary Drivers Behind the Results

Several factors contributed to Starbucks' mixed performance. First, the company’s aggressive investment in wages, benefits, and store enhancements—part of the "Back to Starbucks" strategy—led to a 390-basis-point contraction in operating margin, which fell to 11.9%, below the 12.7% estimate. However, the company believes these investments will drive long-term customer and employee satisfaction, setting the foundation for sustained growth.

A major issue for Starbucks has been the impact of mobile ordering on in-store customer experience. CEO Brian Niccol acknowledged that mobile orders often flood stores faster than customers can physically arrive, causing operational bottlenecks. The company is testing an in-store algorithm to better sequence mobile orders, which could improve workflow efficiency and reduce congestion at pickup counters.

Another headwind is the rising cost of coffee, which Starbucks expects to be a margin pressure in the coming quarters. The company is taking steps to mitigate these costs, including supply chain efficiencies and SKU optimizations in its Global Coffee Alliance segment.

Forward Outlook and CEO Niccol’s Impact

Starbucks did not provide formal full-year guidance, having previously suspended its fiscal 2025 outlook. However, management expressed confidence that its turnaround strategy is gaining traction. CEO Brian Niccol, who previously led successful transformations at Taco Bell and Chipotle, remains focused on simplifying operations, improving store efficiency, and elevating the in-store experience.

Niccol has already made structural changes, including revamping Starbucks’ mission statement, reinstating self-service condiment bars, and implementing a new customer code of conduct. The company also plans to double its U.S. store footprint, with a focus on smaller-format locations optimized for convenience. Meanwhile, layoffs at the corporate level are expected by March as part of a broader efficiency drive.

Starbucks' loyalty program remains a strong asset, with 34.6 million active U.S. members, up 1% year-over-year. This base provides a key competitive advantage, helping Starbucks drive engagement even as traffic trends remain under pressure.

Stock Performance and Technical Analysis

Starbucks shares initially surged to $105 following the earnings report, marking a 26-month high before rolling back to test the $100 psychological support level. The stock is currently trading at 27x forward earnings, a valuation that reflects optimism around Niccol’s turnaround plan but leaves little room for execution missteps. Additionally, the Relative Strength Index (RSI) is above 70, suggesting the stock may be overbought in the near term.

A successful hold of the $100 level could entice bulls to re-enter, particularly given Niccol’s strong reputation as a CEO capable of engineering successful turnarounds. However, failure to hold this level could invite increased volatility, especially as investors weigh the timeline for Starbucks’ recovery.

Conclusion

Starbucks' Q1 results provided both optimism and caution for investors. While the company outperformed expectations on comparable sales and demonstrated early progress in its turnaround, ongoing challenges—particularly in customer traffic and operating margins—underscore the need for further improvement. CEO Brian Niccol is moving quickly to reshape the company’s strategy, and while investors appear willing to give him time, the market will be closely watching how effectively he balances short-term execution with long-term growth aspirations.

With the stock testing key technical levels, sentiment remains constructive but cautious. If Niccol can successfully stabilize same-store sales, optimize mobile ordering, and navigate cost pressures, Starbucks could emerge stronger in the quarters ahead. Until then, the company’s ability to hold the $100 level and execute on its turnaround plan will be the key factors determining investor confidence.