Starbucks: A Stock Up, But Is the Business Really Fixing Itself?

The stock market gave Starbucks a pat on the back yesterday. Shares climbed 2.34% to close at $93.28, beating the broader market. Over the past month, the stock has gained 9.6%, a rally that outpaced the retail sector and the S&P 500. On the surface, it looks like investors are buying the dip, betting the worst is over.

But look deeper, and the story is starkly different. That recent pop does nothing to erase a much longer, tougher year for the business itself. The stock is still down 8% over the past year, and its returns over the past three and five years are negative. This disconnect between a short-term price bounce and a long-term performance slump is the core investment question: is the stock finally pricing in a turnaround, or is it getting ahead of itself?

The underlying business numbers tell the real tale. Last fiscal year, Starbucks reported net income of $1.86 billion, a 51% drop from the prior year. That plunge happened even as revenue grew. The company is working hard to fix this, with CEO Brian Niccol pointing to a recent quarterly turnaround as a sign the "plan is working." But the sheer scale of that profit collapse-cutting earnings in half while sales ticked up-shows the immense pressure the company is under. It's like a business that sold more products but made far less profit on each one, a classic sign of rising costs or margin compression.

So the stock's good day is a hopeful note, but it's playing against a backdrop of a business that just had a very tough year. The rally suggests some investors see light at the end of the tunnel. The financials, however, show the tunnel is still long and dark. The real test is whether the upcoming earnings report can bridge that gap between the stock's optimism and the business's struggles.

The Turnaround Plan: Fixing the Store Experience

CEO Brian Niccol's plan to revive Starbucks is straightforward in its aim: get people back into the stores for the experience, not just the discount. Launched in September 2024, the 'Back to Starbucks' strategy is a reset button for the brand. It focuses on the core elements that made the company famous-the welcoming coffeehouse, the skilled baristas, and the quality of the brew. The changes are tangible: condiment bars are back, baristas can write on cups again, ceramic mugs are more common, and the company is working to cut the wait time to four minutes by adding more staff hours in thousands of stores.

The early signs of this focus are promising. For the first time in seven quarters, global comparable store sales turned positive last quarter. That's a critical milestone, showing the plan is starting to move the needle on customer traffic. In the U.S. and Canada, the core market, sales were flat, but that's a step up from the deep declines of the past. Internationally, the story is stronger, with China seeing a 2% sales gain driven by a surge in transactions.

Yet the financial picture remains mixed, revealing the cost of this transformation. While sales are stabilizing, the company's profit margins are under severe pressure. The North America segment margin fell 730 basis points last year, a staggering drop that highlights the intense cost of the turnaround. More broadly, the company's operating margin is 180 basis points below estimates. This gap between sales recovery and profit collapse is the central tension. The company is investing heavily in labor and store experience, which is good for the brand but bad for the bottom line in the short term. It's like spending extra on a renovation to attract customers, knowing the monthly mortgage payment will be higher until the new tenants arrive.

So the plan is working in one key area-getting people back through the door. But the financial results show the business is still bleeding at the margins. The turnaround is a work in progress, where the early wins on sales are being paid for with a sharp drop in profitability. The market is watching to see if the profit side can catch up once the store experience is fully re-established.

The Financial Math: Growth vs. Profitability

The core of Starbucks' current investment story is a stark trade-off. The company is growing its top line, but that growth is coming at a brutal cost to its bottom line. Last fiscal year, revenue climbed 2.8% to $37.18 billion, a solid gain. Yet net income collapsed 51% to $1.86 billion. The reason is clear: the company took a massive $892 million in restructuring and impairments charges. In other words, the business is spending heavily to fix itself, and those costs are being booked now, not later.

This sets up a difficult near-term path. The company is projected to report a $15.94% decline in Q1 EPS of $0.58, even as revenue is expected to grow 2.67%. The math is simple: sales are ticking up, but the profit per sale is still being crushed by the heavy investments in labor, store experience, and the ongoing restructuring. It's a classic case of sacrificing short-term earnings for long-term health, but the market will be watching closely to see when that health translates to the income statement.

This tension is reflected directly in the analyst split. On one side, Citigroup maintains a 'Neutral' rating with a price target of $94, a moderate view that acknowledges the challenges. On the other, Barclays is more bullish, keeping an 'Overweight' rating with a target of $110. Their differing views capture the central uncertainty: is the turnaround plan working fast enough to justify the premium valuation, or is the profit pressure set to persist longer than the market hopes?

The bottom line is that the financial math is not yet balanced. The company is successfully driving sales recovery, but the path to profitability is steep and expensive. For the stock to keep climbing, investors need to see clear, early signs that the profit margin pressure is starting to ease as the store experience improvements begin to pay off. Until then, the growth and the pain are moving in lockstep.

Catalysts and Risks: What to Watch Ahead

The stock's recent rally has set high expectations. Now, the real test is in the coming weeks. The upcoming earnings report on January 28, 2026 is the immediate catalyst. Investors will scrutinize two key numbers: same-store sales trends and the pace of margin recovery. The company is expected to report a 15.94% decline in Q1 EPS, even as revenue grows. The market will be watching for any sign that the profit pressure is easing, as the turnaround plan's success must soon show up in the bottom line.

The major near-term risk is the so-called 'visit gap.' While the company's global comparable store sales turned positive last quarter, that gain was driven by a 1% increase in average ticket, not more customers. In fact, Starbucks saw a slight year-over-year decline in visits last quarter, while its competitor Dunkin' saw overall visits grow 1.7%. This gap in customer traffic is the core vulnerability. The turnaround plan is about bringing people back for the experience, but if the visit count isn't growing, the sales gains are likely just from higher prices, which is a fragile foundation.

For investors, the specific metrics to watch are clear. First, look for progress on improving transaction comps sequentially. The company has already seen its U.S. company-operated sales comp turn positive in September and remain there. The next step is to see if that trend continues and strengthens. Second, the focus must be on restoring North America margins. The segment's margin fell 730 basis points last year, and the company's operating margin is still 180 basis points below estimates. Any sign that labor and experience investments are starting to pay off in higher profitability will be the green light for the stock's optimism to be justified.