Starbucks (SBUX) Earnings Preview: Strategy Under the Microscope Again

As Starbucks prepares to release its fiscal Q1 earnings report, all eyes are on how the company’s nascent "Back to Starbucks" turnaround plan under CEO Brian Niccol is shaping its performance. With the coffee giant navigating leadership changes, labor unrest, and challenging macroeconomic conditions in key markets like China, investors are keen to understand whether the company can deliver on its promise of a revitalized customer experience and operational improvements.

Earnings and Revenue Expectations

The FactSet consensus projects adjusted earnings per share of $0.67, representing a 26 percent year-over-year decline, and revenue of $9.32 billion, a slight 1 percent drop. These figures reflect ongoing pressures across Starbucks’ operations, including weaker consumer spending, labor issues, and competitive dynamics.

Key Areas of Focus

The Back to Starbucks Plan

Unveiled under the leadership of Brian Niccol, who joined as CEO five months ago, the Back to Starbucks plan emphasizes menu simplification, reintroducing popular features, and modernizing store environments. While these initiatives aim to win back customers and improve operational efficiency, the strategy is still in its early stages.

Investors will closely monitor management commentary for indications of progress, particularly in customer engagement metrics, operational improvements, and early financial impact. The market will likely view tangible evidence of improvement—whether in customer satisfaction, transaction volumes, or cost efficiencies—as a sign that the strategy is gaining traction.

Labor Challenges

Starbucks is contending with ongoing labor issues, as evidenced by the Starbucks Workers Union’s decision to authorize a strike during the 2024 holiday season. While the company reported only minimal disruptions at the time, prolonged labor unrest could lead to higher operational costs, potential store closures, and reputational damage.

Labor relations will remain a critical area for investors, as Starbucks must balance improving employee conditions with maintaining profitability. Any management commentary on negotiations or measures to address labor concerns could sway investor sentiment.

China’s Volatility

China’s performance remains a significant concern for Starbucks, contributing approximately 10 percent of the company’s annual revenue. Last quarter, comparable sales in China fell by 14 percent, a steeper decline than the 7 percent drop in global comps. The weakness stemmed from increased competition and a soft macroeconomic environment that dampened consumer spending.

Management’s acknowledgment of the challenges in China underscores the importance of this region to Starbucks’ growth strategy. Initiatives to strengthen its presence, including potential strategic partnerships, will be critical to turning the tide in this key market. Investors will look for updates on China’s recovery trajectory and how the company plans to navigate intensified competition.

North American and International Trends

The softness in China is mirrored by declines in Starbucks’ North American and international operations. U.S. comparable sales dropped 6 percent last quarter, driven by a 10 percent decline in transactions, partially offset by price increases. International comps fell 9 percent, reflecting global pressures on discretionary spending.

Given these declines, Starbucks must show sequential improvement in Q1 to reassure investors that its turnaround strategy is on track. The rally in Starbucks’ stock, which has risen 14 percent since December, suggests that market participants are optimistic about the company’s prospects. However, a failure to deliver notable progress could temper this momentum.

Guidance and Outlook

One of the most anticipated aspects of Starbucks’ earnings call will be the potential reinstatement of fiscal 2025 guidance. The company suspended guidance last year to reassess its business and refine its strategy. Providing clarity on its financial outlook would signal confidence in its turnaround efforts and offer investors a clearer roadmap for evaluating its progress.

Investment Considerations

For investors, Starbucks presents a mix of challenges and opportunities:

1. Early results from the Back to Starbucks plan could indicate whether management’s strategy is effectively addressing customer and operational issues.

2. Labor unrest and rising costs represent a risk to margins, particularly if the company is unable to resolve disputes with its workforce.

3. The performance in China will serve as a bellwether for Starbucks’ ability to navigate competitive pressures and macroeconomic headwinds in a critical growth market.

4. Reinstating guidance for fiscal 2025 would provide greater visibility into the company’s trajectory and could bolster investor confidence.

Conclusion

Starbucks’ Q1 earnings report will provide valuable insight into how the company is managing its turnaround strategy amid a complex operating environment. While the Back to Starbucks plan shows promise, its early-stage nature leaves room for uncertainty.

Labor dynamics and the trajectory of international markets, particularly China, will remain crucial variables in Starbucks’ recovery. Investors will be looking for evidence of operational improvements, customer engagement, and strategic clarity to justify the recent rally in the stock.

As Starbucks charts its path forward, the interplay of short-term challenges and long-term opportunities will determine whether it can regain its footing as a leader in the global coffee industry. For now, the earnings call will be a critical moment to gauge whether the company’s vision aligns with investor expectations.