Starbucks Stock Surges 4% on China Sales Growth, Turnaround Progress

Starbucks (SBUX.US) experienced a rise in its stock price during after-hours trading on Tuesday, following the company's emphasis on the progress of its turnaround plan. Despite missing market expectations for same-store sales and profit in the third quarter of the fiscal year 2025, investors focused on the positive signals in the earnings report, including the first sales growth in China since the end of 2023. The CEO highlighted that the transformation plan is "progressing beyond expectations" and promised to "spark a wave of innovation" by 2026.

The CEO noted that while the financial performance has not yet fully reflected the reform results, the revival steps are ahead of schedule. Drawing from past experiences in successfully addressing a food safety crisis at Chipotle, the CEO indicated that the company's momentum is turning positive. As a result, Starbucks' stock rose over 4% in after-hours trading on Tuesday.

The earnings report showed that Starbucks' third-quarter revenue grew 3.8% year-over-year to 94.56 billion dollars, exceeding market expectations of 93.1 billion dollars. Adjusted earnings per share were 0.50 dollars, down 46% year-over-year and below market expectations of 0.65 dollars. Same-store sales decreased by 2%, missing market expectations of a 1.5% decline. In the U.S., same-store sales decreased by 2%, compared to market expectations of a 2.53% decline. In China, same-store sales grew by 2%, marking the first increase in a year and a half and exceeding market expectations of a 1.44% growth.

Starbucks, currently in the midst of comprehensive reforms, has experienced an unprecedented decline in same-store sales over the past year and a half. Since taking office in September 2022, the CEO has aimed to revitalize the U.S. market through initiatives such as reducing wait times, updating menus, and renovating stores to restore seating areas.

While analysts and investors generally endorse these reform plans, they seek more details on the timeline and costs. On Tuesday, the CEO revealed that Starbucks has reduced store construction costs by 30%. Additionally, a new plan involving increased staffing, improved customer service, and prioritizing dine-in and drive-through orders has resulted in "faster service, stronger sales, and better customer experiences."

However, these advancements have not yet fully translated into overall financial data. Starbucks' third-quarter same-store sales decreased by 2%, marking the sixth consecutive quarter of decline. The 2% decrease in U.S. same-store sales was primarily due to a reduction in transaction volume. Nevertheless, the CEO stated, "In the U.S., employee engagement has increased, customer connection scores have improved, shift completion rates have reached new highs, and transaction volumes from non-Starbucks Rewards program customers have recovered and grown. More stores are achieving positive transaction growth."

In China, Starbucks' second-largest market, the company has implemented measures such as lowering prices for certain tea beverages and adding sugar-free options to address long-term sluggishness. These efforts have shown initial success, with transaction volumes increasing by 6% and same-store sales rising by 2% in the current quarter. This marks the first same-store sales growth in China in a year and a half. Previously, Starbucks had been considering selling part of its stake in China. The CEO mentioned that over 20 institutions have expressed interest, and the company aims to retain a "significant" stake.

Starbucks' operating profit margin declined in the third quarter, primarily due to expenses related to the transformation plan, such as increasing store staff, costs associated with the Las Vegas store manager conference, and inflationary pressures. The company's chief financial officer stated that Starbucks will invest an additional 5 billion dollars in labor costs for its company-operated stores in the U.S. over the next year. However, due to changes brought about by the transformation and the uncertain consumer environment, the company maintains a "cautious" outlook for the remainder of the fiscal year. The chief financial officer added, "Transaction volumes are improving, but it is unclear what level they will ultimately reach."