Starbucks Faces Tumultuous Times Under New CEO Brian Niccol
Investors in Starbucks (NASDAQ: SBUX) anticipated that Brian Niccol, the former stellar CEO of Chipotle, wouldn’t instantly resolve the company’s issues. However, the disappointing fiscal fourth-quarter performance, ending Sept. 29, caught many off guard.
Last week, Starbucks released preliminary results to investors, setting the stage before the full report next Wednesday. The stock declined by 4.2% in after-hours trading on Tuesday, signaling investor dissatisfaction as the results were dismal across multiple fronts.
Disappointing Performance Metrics
Comparable-store sales dropped 7% globally, while U.S. sales fell 6%, driven by a 10% reduction in transactions. The decline in China persisted, with comps down 14% in its second-largest market.
Revenue decreased by 3% to $9.1 billion, falling short of the expected $9.38 billion. Adjusted earnings per share plummeted 24% to $0.80, significantly below estimates of $1.03.
Management accepted responsibility, stating that investments in new product lines, in-app promotions, and integrated marketing did not translate into improved customer engagement. They noted weak customer traffic among both Starbucks Rewards and non-Rewards members.
In China, the company attributed its struggles to increased competition and a challenging economic environment.
Starbucks also withdrew its guidance for fiscal 2025, hinting at a potentially lengthy recovery process. Management stated this decision would allow for a thorough evaluation of business strategies.
Future Uncertainty for Starbucks
This statement raises concerns that fiscal 2025 may be another difficult year for Starbucks. Investors may need to prepare for ongoing challenges at least until the first half of fiscal 2025.
Image source: Getty Images.
Can Niccol Reverse the Trend?
Starbucks’ stock surged 24.5% upon Niccol’s appointment, a rarity for CEO transitions, reflecting investors’ hopes for a turnaround reminiscent of Chipotle’s post-E. coli recovery. Nevertheless, Starbucks faces more structural challenges than Chipotle did at that time, making it a more intricate operation globally.
In a brief video accompanying the report, Niccol reiterated his commitment to reviving the U.S. business by supporting baristas, simplifying the menu, streamlining ordering processes, and restoring the coffeehouse ambiance that the brand is known for.
More details are expected in the upcoming earnings call, yet the initial results and withdrawal of guidance indicate the turnaround effort has yet to gain traction. Niccol has been visiting stores and engaging with employees and customers, and shortly after taking the helm, he announced the “Back to Starbucks” plan.
Despite the troubling results, the company surprised investors by increasing its quarterly dividend from $0.57 to $0.61, indicating a show of confidence in the business, even as cash flow appears to be declining.
Starbucks Remains a Risky Investment
The stock currently trades around the same level as when Niccol was appointed. It remains at a premium, contingent on expectations of his ability to restore the brand.
For the stock to deliver returns moving forward, Starbucks must now exceed the high expectations established since Niccol’s arrival. While he deserves investor trust and time to implement his strategy, the preliminary results serve as a sobering reminder that the company’s trajectory is concerning. Had it not been for the goodwill Niccol has cultivated, the stock could have dropped even further.
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Jeremy Bowman has positions in Chipotle Mexican Grill and Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
