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Starbucks (NASDAQ: SBUX)
Q4 2024 Earnings Call
Oct 30, 2024, 5:00 p.m. ET
Starbucks Reports Q4 2024 Results Amid Ongoing Challenges
Key Highlights from Today’s Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks fourth quarter and full fiscal year 2024 conference call. [Operator instructions] Now, I will turn the call over to Tiffany Willis, the senior vice president of investor relations.
Tiffany Willis — Vice President, Investor Relations
Thank you, Diego, and good afternoon, everyone. Thank you for joining us to discuss Starbucks fourth quarter and full fiscal year 2024 results. Today’s discussion will be led by Brian Niccol, chairman and chief executive officer; and Rachel Ruggeri, executive vice president and chief financial officer. This call includes forward-looking statements that could differ from actual results. Please consider our cautionary statements included in our earnings release and risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q.
There is no obligation to update these forward-looking statements. The GAAP results in the fourth quarter of fiscal year 2024 include several items related to strategic actions, which are excluded from our non-GAAP results. All numbers mentioned today will be on a non-GAAP basis unless noted otherwise.
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In line with our non-GAAP results, metrics such as revenue, operating margin, and EPS are reported in constant currency. This means current results are converted into U.S. dollars using the average monthly exchange rates from the comparative period. For reconciliations of non-GAAP measures to GAAP measures, please visit our website at investor.starbucks.com. A recorded version of this call will be available on our site until Friday, December 13th, 2024. Also, tentatively mark your calendars for our first quarter fiscal year 2025 earnings call, set for Tuesday, January 28th, 2025.
Now, I’ll turn the call over to Brian.
Brian Niccol — Chairman and Chief Executive Officer
Thank you, Tiffany, and good afternoon, everyone. I’m excited to lead Starbucks, a company renowned for its brand excellence and coffee expertise. Since starting here last month, I’ve engaged with partners and customers, gaining valuable insights into our operations.
My experiences have reinforced the incredible strengths we possess. Our brand remains robust, our team is outstanding, and we’re ready to take the necessary steps for improvement. I will share more details about my vision shortly. First, I’ll hand it over to Rachel, who will provide a detailed look at our Q4 and full fiscal year 2024 financial results. Rachel?
Rachel Ruggeri — Executive Vice President, Chief Financial Officer
Thank you, Brian, and welcome to your first Starbucks earnings call. Good afternoon, everyone. As noted in our press release last week, we faced traffic challenges in Q4. This impacted our overall performance, affecting everything from revenue to earnings. In Q4, our consolidated revenue reached $9.1 billion, a decline of 3% from the prior year. This downturn was driven by a 7% decrease in comparable store sales, which included an 8% drop in transactions but a slight 2% rise in average ticket, due, in part, to net new company-operated store growth of 7%.
The primary reason for the revenue decrease was a 6% fall in U.S. comparable store sales, stemming from a 10% drop in transactions. However, this was somewhat offset by a 4% rise in average ticket prices. Across all channels and times of day, we saw traffic declines, especially in the afternoon. Despite a 4% annual increase in active Starbucks Rewards membership to 33.8 million, member visits lost momentum due to ineffective product innovations and promotions. Meanwhile, China faced a staggering 14% decrease in comparable store sales amidst a highly competitive market.
Our Q4 consolidated operating margin stood at 14.4%, a drop of 370 basis points from the previous period…
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Starbucks Reports Mixed Fiscal Year 2024 Results Amid Strategic Changes
Starbucks is navigating through a challenging fiscal year, revealing financial results that highlight both progress and hurdles. As the company aims to regain its footing, the focus shifts to adapting its strategy and enhancing customer experiences.
Financial Overview: Revenue Growth Offset by Challenges
The company’s financial performance faced setbacks with a contraction in operating margin reflecting this tension. The decrease was influenced by rising store partner wages and benefits, alongside intensified promotional activities. Although the contraction was tempered by pricing strategies and improvements in store operations, the overall outlook remains complex. The increase in operational hours for partners has helped reduce hourly turnover and training costs, but further staffing adjustments are necessary.
Operational Efficiencies Yield Encouraging Results
On a more promising note, efforts to boost efficiency, both in-store and throughout the supply chain, led to savings of approximately 150 basis points for the quarter. However, General and Administrative (G&A) expenses surpassed expectations, exceeding 7% of revenue in Q4, primarily due to unplanned expenses related to third-party services. After adjusting for these costs, G&A represented 6.6% of revenue, aligning with the latter half of fiscal 2024 expectations. The company anticipates further G&A reductions relative to revenue, aiming for sustained margin recovery.
Year-End Summary: Mixed Results and Future Focus
For the full fiscal year, consolidated net revenues climbed 1% to $36.2 billion, spurred by a 7% growth in new company-operated stores, despite a 2% decline in comparable store sales. The full-year operating margin was 15%, down 110 basis points from the previous year, attributed to increased investments in partner wages and promotional strategies. Overall, in-store and out-of-store efficiency strategies led to nearly $1 billion in cost reductions, reflecting a solid commitment to long-term financial health.
Outlook and Capital Allocation Priorities
Shifting focus, the company has suspended fiscal year 2025 guidance due to leadership transitions and the necessity for a thorough business assessment. This pause presents an opportunity to refine strategies and recommit to their objectives. Acknowledging the current environment, Starbucks is prioritizing its legacy as a community coffee house by scaling back on new store openings and renovations to better incorporate redesign efforts.
Dividend Increase Amid Challenges
This strategic shift does not undermine Starbucks’ growth outlook. Approximately 40% of U.S. company-operated stores recorded positive growth in the last fiscal year, significantly driven by newer locations in less saturated markets. Moreover, an increase in the quarterly cash dividend from $0.57 to $0.61 highlights management’s confidence in future stability, marking the 14th consecutive year of dividend growth at about 20% CAGR. This decision aims to reinforce shareholder trust during transformative times.
A Commitment to Core Values and Customer Experience
On a broader note, company leadership acknowledged the need for a fundamental strategy shift to restore customer loyalty. With several initiatives underway, including improving staffing levels and bringing back condiment coffee bars, the aim is simple: enhance the customer experience by streamlining service delivery. The focus will be on quality and efficiency, ensuring that crafted beverages are readily available within four minutes. This emphasis on operational precision is poised to re-establish Starbucks as a preferred destination for coffee lovers.
As the company navigates these changes, optimism persists about returning to its core principles. Leadership remains confident that by focusing on what made Starbucks popular, they can restore growth and brand loyalty.
In conclusion, while challenges are evident, Starbucks is taking deliberate steps to realign with its identity, aiming for a brighter future.
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Starbucks Charting a Path to Elevated Customer Experience by 2025
Enhancing Coffee Quality and Service Speed
Starbucks plans to enhance customer experience by expanding its Clover Vertica brewers to all company-operated cafes by the end of fiscal year 2025. This initiative aims to provide more high-quality, on-demand coffee options. Additionally, the company is revising store routines to expedite brewed coffee delivery upon ordering.
Simplifying the Menu for Consistency
To ensure quality and reliability, Starbucks will simplify its menu, emphasizing fewer, high-quality offerings that align with its core identity as a coffee company. The aim is to streamline the customer experience without compromising choice.
Improving Mobile Order Efficiency
Mobile orders currently account for over 30% of transactions. However, during peak hours, the influx can overwhelm cafe staff. Starbucks is developing new algorithms to enhance the sequencing of mobile order handoffs, targeting an optimal four-minute wait time. The company also intends to introduce guardrails for mobile orders, improving the overall experience while separating pickups from the dining experience.
Revamping Pricing Structure
Starting November 7, Starbucks will eliminate the upcharge for nondairy milk in its North American cafes as part of a broader effort to simplify pricing, making it easier for customers to customize drinks without feeling charged unfairly. Nearly half of the customers opting for milk modifiers could see price reductions of 10% or more.
Reinforcing the Cafe Experience
Starbucks is committed to reclaiming the inviting atmosphere of its cafes, which have been likened to the traditional coffee house. Plans include serving coffee in ceramic mugs and revisiting cafe designs to introduce more comfortable seating. This initiative seeks to restore cafes as desirable spots for customers to relax and work.
Revisiting Marketing Strategies
Starbucks is taking steps to better market its premium coffee quality. Focusing less on discount-driven promotions, the company aims to emphasize its crafting process, from sourcing to brewing. Simultaneously, a new marketing campaign will engage a wider audience, promoting a consistent message: Starbucks delivers exceptional coffee.
Growth and Expansion Opportunities
While the U.S. market remains a priority, growth opportunities internationally, especially in markets beyond China, are being explored. The company’s leaders recognize the need to maintain its identity while providing consistently high-quality products and services. By simplifying processes and focusing on core values, Starbucks expects to enhance its brand strength and financial performance.
Looking Ahead
Starbucks is optimistic that these initiatives will lead to increased customer engagement and satisfaction. With benchmarks in place, the company is prepared to share results and insights from pilot projects as they develop. Now, let’s open the floor for questions.
Questions & Answers:
Operator
[Operator instructions] Your first question comes from Jeffrey Bernstein with Barclays. Please go ahead.
Jeffrey Bernstein — Analyst
Thank you for your insights, and welcome to Starbucks, Brian. As you’ve engaged with baristas over the last 50 days, what key insights have you gathered? Where do you see the greatest opportunities? Specifically, what lessons from your time at Chipotle might translate well to Starbucks?
Brian Niccol — Chairman and Chief Executive Officer
Thank you for your warm welcome. It’s a privilege to be part of Starbucks and to…
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During a recent conversation, the leadership team at Starbucks gathered feedback from baristas across the country about their experiences and suggestions for enhancing service.
The baristas, who work on the West Coast, East Coast, Midwest, and South, expressed a strong passion for the Starbucks brand and a commitment to serving high-quality coffee. They particularly enjoy preparing espresso-based drinks such as flat whites, lattes, and cappuccinos. Their enthusiasm for crafting these beverages was evident when asked about their favorite drinks to prepare.
In response to inquiries about areas for improvement, a consistent piece of feedback highlighted the need for better organization in serving brewed coffee. Baristas suggested reintroducing the coffee condiment bar, noting that it would significantly enhance service speed for both customers and staff. Additionally, they raised concerns about staffing during peak hours. To address this, Starbucks plans to pilot new labor models to ensure baristas can maintain high service standards while managing mobile orders effectively.
Another noteworthy request from baristas was the reinstatement of café dining areas. They value the community aspect of the coffee house and cherish the connections they build with customers, especially regulars. Many baristas see their cafes as a gathering place and take pride in creating a welcoming environment.
Furthermore, baristas mentioned the desire for a simpler customization process for drinks. By introducing some limitations, they believe it could streamline operations and improve efficiency behind the counter. The dedication of Starbucks employees parallels the commitment seen at other successful brands, such as Chipotle. Both companies benefit from a dedicated workforce passionate about delivering quality service.
Starbucks CEO Brian Niccol reflected on the brand’s significance to its customers. He acknowledged the responsibility that comes with maintaining that connection and committed to using employee feedback to drive improvements. The engagement of employees is critical for enhancing customer experiences, with Niccol emphasizing that happy employees lead to satisfied customers.
Analyst Sara Senatore from Bank of America noted comparisons between Starbucks and Chipotle, particularly in resource reallocation for efficiency gains. She praised the company’s decision to reduce upcharges for non-dairy milk, which caters to the changing preferences of consumers.
Responding to Senatore’s questions, Niccol confirmed the strategy of eliminating ineffective practices and focusing resources on successful initiatives. He assured that adjustments in staffing and marketing will align with the goal of providing top-notch service every time. The overall aim is to create opportunities for baristas to thrive in their roles while ensuring customers enjoy a memorable experience.
Starbucks is poised for a transformative period, as leadership takes the insights gathered seriously, setting the stage for continued growth and enhanced customer engagement.
Rachel Ruggeri — Executive Vice President, Chief Financial Officer
In closing, Ruggeri discussed the company’s efficiency efforts alongside planned investments. While some financial impacts may be seen in the short term due to these investments, they are expected to positively influence transactions moving forward.
The Starbucks team remains committed to balancing operational efficiency with the quality of service, continuously aiming to improve customer satisfaction in every interaction.
Starbucks Discusses Menu Simplification and Product Innovation in Analyst Call
Understanding Key Changes Ahead for Starbucks
As Starbucks prepares for fiscal year 2025, it acknowledges the impact of lower performance-based compensation on its general and administrative expenses. The company is committed to refining its operations to enhance customer experience while improving profitability.
Operator
Next, we have Brian Harbour from Morgan Stanley. Please go ahead with your question.
Brian Harbour — Morgan Stanley — Analyst
Good afternoon. Thank you for the insights, Brian, and welcome. I have a question regarding the simplification of the menu. What changes are currently planned, and what kind of timeline do you anticipate for implementation? Additionally, could you elaborate on the strategies for managing customization? Moreover, what pace of innovation do you think is appropriate for Starbucks?
Brian Niccol — Chairman and Chief Executive Officer
To address your first question, we are in the midst of simplifying our menu, both for beverages and food. There are items that we will undoubtedly remove, while others may require testing to ensure a smart exit strategy. With respect to customization, we recognize that our current systems can overwhelm customers, and we intend to streamline this. By creating clear guidelines, we will make it easier for customers to select their drinks and aid our partners in delivering quality service. Pricing will also be addressed to eliminate surprises for our customers.
Regarding innovation, I am currently familiarizing myself with Starbucks’ processes. I found that we have a stage gate process for innovation, which has not been consistently applied lately. Moving forward, we’ll adopt this method to ensure new products are well-supported and can be executed efficiently in stores. This shift will slow the pace compared to the previous two years, emphasizing a more disciplined approach to how we introduce new offerings.
Operator
Thank you. The next question will come from John Ivankoe of J.P. Morgan. Please go ahead.
John Ivankoe — Analyst
Thank you for taking my question. Brian, you mentioned food, which represents nearly 25% of Starbucks’ sales and 40% of transactions. With ongoing discussions around enhancing baked goods and sandwiches, how do you prioritize food in your strategy? Is this an area for long-term growth, or will the focus remain primarily on beverages?
Brian Niccol — Chairman and Chief Executive Officer
Thank you, John. Food is indeed crucial to our strategy. While prioritizing quality in our beverages, we also aim to elevate our food offerings. We believe that by focusing on fewer high-quality food items, we can enhance the overall customer experience and drive growth in this segment. You’ll see some positive changes soon as part of this focus.
Operator
Next, we’ll hear from David Tarantino of Baird. Please go ahead.
David Tarantino — Analyst
Hi there. I’d like to discuss the store redesign efforts. What specific elements are you considering, and what benefits do you anticipate from these changes? Additionally, do you foresee a major remodel cycle in the coming years?
Brian Niccol — Chairman and Chief Executive Officer
Thank you, David. Our goal is to minimize renovation costs while enhancing the customer experience. We want to create inviting spaces with suitable seating arrangements while clearly separating the in-store and mobile order pickup experiences. Ultimately, we aim to provide an enjoyable café atmosphere that encourages customers to savor their time inside. Elements like bringing back ceramic mugs for in-store patrons and improving furniture quality are part of the approach to create warmth and comfort. Operationally, we emphasize efficiency, aiming for quick service with clarity in how customers receive their orders.
Through these changes, we hope to cultivate a welcoming environment that makes customers want to linger, thus enriching their connection to Starbucks.
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Starbucks Plans to Enhance Customer Experience with New Strategies
Starbucks is set to bring back Sharpies for baristas, allowing them to personalize coffee experiences and strengthen community connections. Employees will have the tools to add a unique human touch to each order, reinforcing Starbucks’ place as a community gathering spot.
In addition to this effort, the company is focused on improving mobile orders. A dedicated area for mobile pickups will be established, ensuring customers can easily find their drinks and be on their way quickly. Drive-through efficiency remains a priority, as accuracy in fulfilling orders is essential.
Operator
Your next question comes from Andrew Charles with Cowen. Please state your question.
Andrew Charles — Analyst
Thank you. Brian, Chipotle’s success stemmed from its ability to streamline operations with its digital make line. Is something similar being planned for Starbucks?
Brian Niccol — Chairman and Chief Executive Officer
Absolutely, Andrew. I’m particularly excited about the Siren Craft system. This system, which includes both equipment and process improvements, will help us achieve our goal of serving customers in under four minutes. Additionally, it will allow us to manage mobile orders more effectively by establishing precise pickup times.
We’ve identified bottlenecks we need to address, some of which require full system implementation, while others may just need partial upgrades. Our goal is to ensure every store efficiently serves customers in a timely manner. As we implement this system, we’ll adapt based on the specific needs of each location.
Operator
Your next question comes from David Palmer with Evercore ISI. Please state your question.
David Palmer — Analyst
Thank you. Following up on the operational changes for baristas, will we see an accelerated rollout of the Siren system? Can you clarify how your vision has shifted regarding that implementation?
Brian Niccol — Chairman and Chief Executive Officer
David, we’re setting a new standard for service time—a target of under four minutes. Previously, we focused on individual pain points rather than the broader system solutions we need. In discussions with staff and customers, we found that many experienced baristas are capable of crafting drinks in just two and a half minutes. This informs our strategy moving forward.
The sources of delay vary; sometimes they are linked to food preparation, while other times it’s the mix of beverages or mobile orders that create bottlenecks. Therefore, we are committed to ensuring both in-store and mobile orders can be fulfilled quickly and accurately, including reducing drive-through wait times. We already meet the four-minute service time for about 50% of our stores, demonstrating its feasibility for all locations.
Operator
Thank you. Your next question comes from Christine Cho with Goldman Sachs. Please state your question.
Christine Cho — Analyst
Thank you for taking my question. So I know…
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Starbucks CEO Details Strategy for Growth and Efficiency Improvements
Investment Plans to Boost Traffic and Infrastructure
During a recent Q&A session, Brian Niccol, CEO of Starbucks, discussed how the company plans to restore traffic momentum and enhance store infrastructure for partners and guests. Niccol emphasized that while he could not provide specific financial numbers at this time, there are considerable areas for investment.
Niccol identified key focus areas, saying, “We must improve the partner and customer experience. This includes ensuring that orders are fulfilled within four minutes and managing mobile orders efficiently.” He also highlighted the importance of refining pricing structures, enhancing outreach beyond Starbucks Rewards members, and fostering a welcoming environment in stores.
In his remarks, Niccol expressed optimism about leveraging current assets, particularly the rewards program, which he views as a crucial component of their marketing strategy. He believes that by enhancing their innovation processes and adhering to operational standards, the company can set a strong foundation for future growth.
Efficiency and Cost Optimization Efforts
Regarding the previously announced $1 billion per annum efficiency unlock program, Niccol stated, “Our supply chain team has demonstrated great improvement in our collaborations with vendors, allowing us to bring products to market more effectively.” He noted that when the right products are delivered at optimal times, the entire process becomes much more streamlined.
Rachel Ruggeri, CFO of Starbucks, added that the company intends to focus on productivity gains. She mentioned, “We will reassess our strategies as part of our ‘back to Starbucks’ plan, aiming for optimal efficiencies.” While the specific $1 billion target may not be the primary focus, these efficiency efforts are anticipated to support future investments and contribute to margins and earnings growth.
A Deeper Look at Menu Simplification
Later in the session, Jon Tower from Citi raised questions about Starbucks’ recent menu simplification, specifically regarding nondairy modifiers. Niccol acknowledged that the company is in the early stages of streamlining its menu. He noted, “Reducing the number of products can minimize complexity and waste, while focusing on popular menu items that enhance customer interaction.” He cautioned that the simplification process may face challenges as customers are often attached to their favorite items.
On the topic of nondairy modifiers, Niccol pointed out that customers often seem to expect a premium for high-quality beverages, yet some customization options complicate the pricing structure and customer experience. He remains committed to addressing these concerns as the company moves forward in simplifying its offerings.
As Starbucks continues to navigate its business strategies, executives remain optimistic about the potential for growth and innovation, underscoring the importance of restoring essential customer experiences across both company-owned and licensed stores.
Starbucks Focuses on Growth with Strategic Investments
Future Investments Expected to Drive Customer Engagement
As Starbucks works towards rekindling customer interest, executives express confidence in new investments, particularly in alternative milk options. Starbucks’ ongoing strategies are aimed at enhancing brand loyalty and re-engaging consumers. Rachel Ruggeri, Executive Vice President and Chief Financial Officer, explained that most spending will occur in the first half of the year, with a stronger performance anticipated in the latter half as these strategies take effect. “We foresee a near-term effect from these investments, expecting more customer traffic as a result,” she stated.
Challenges and Potential of the Siren System
Analyst Peter Saleh from BTIG raised questions about the Siren system, which has been present for about two years. He noted concerns regarding its disruptive nature during store renovations. In response, Brian Niccol, Chairman and Chief Executive Officer, acknowledged the need for smoother renovation processes and suggested that the Siren system’s implementation might have been complicated by unclear objectives. “Ultimately, we’re striving for a seamless experience across multiple service modes, including in-café, mobile ordering, drive-through, and delivery,” he explained. With four access modes and three lines of business—hot, cold, and food—clear operating standards are crucial for improving efficiency.
Addressing Value and Simplifying Prices
Another important topic came from Lauren Silberman of Deutsche Bank who asked about customer perceptions of value and pricing architecture. Niccol emphasized the importance of simplifying Starbucks’ pricing strategy. He noted that excessive complexity in customization can lead to customer confusion. “When we streamline pricing, customers will better understand what they’re paying for and what they’re receiving,” he said. He further highlighted the company’s commitment to quality in every cup of coffee served, reaffirming that by making adjustments like allowing alt dairy at no extra cost and introducing coffee condiment bars, Starbucks aims to enhance customer experiences.
Looking Ahead
As the call concluded, Niccol expressed his privilege in leading Starbucks, underscoring the company’s status as a unique and respected brand. The upcoming months will focus on implementing these strategic changes to bolster growth while ensuring an exceptional service experience for customers.
Starbucks Outlines Strategic Changes Following Disappointing Q4 Results
Starbucks has acknowledged challenges in its fiscal fourth quarter but is optimistic about future growth as it pivots its operational focus. During an earnings call, executives discussed their commitment to enhancing customer experience and refining store operations.
Steps Toward Improvement
In response to disappointing results, Starbucks is implementing a new strategy aimed at revitalizing the brand. Leadership highlighted plans to improve store efficiency and quality while recalibrating mobile order systems to make visits smoother for customers.
Aiming for Customer Satisfaction
The changes are designed not only to attract customers back into Starbucks locations but also to enhance the work environment for baristas. Leadership expressed a strong commitment to creating an enjoyable café atmosphere where employees take pride in their roles.
Confidence Amid Challenges
Despite immediate difficulties, executives remain positive about the company’s enduring strengths, including a robust brand and a concrete plan for recovery. Continued updates on progress will be shared with stakeholders as execution of these strategies unfolds.
Operator
[Operator signoff]
Duration: 0 minutes
Call Participants:
Tiffany Willis — Vice President, Investor Relations
Brian Niccol — Chairman and Chief Executive Officer
Rachel Ruggeri — Executive Vice President, Chief Financial Officer
Jeffrey Bernstein — Analyst
Sara Senatore — Analyst
Brian Harbour — Morgan Stanley — Analyst
John Ivankoe — Analyst
David Tarantino — Analyst
Andrew Charles — Analyst
David Palmer — Analyst
Christine Cho — Analyst
Jon Tower — Analyst
Peter Saleh — Analyst
Lauren Silberman — Deutsche Bank — Analyst
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