Starbucks Stock: Turnaround Strategy Opportunity for Investors

Key Points

• Starbucks posted a tepid 2nd quarter, but green shoots are appearing as the turnaround begins to gain traction.
• Margin contraction is due to investment in labor, digital, and throughput intended to boost customer satisfaction.
• An accelerated rollout of improved services is set to be completed by year's end and will drive sequential improvements in the long term.

Starbucks' NASDAQ: SBUX stock price did not respond favorably to the Q2 results and outlook despite Brian Niccol's impact on the company. Surely, the weakness in results, specifically earnings, is a concern, but it is tied entirely to investment in the turnaround. Labelled 'Back to Starbucks,' Niccol is focusing on atmosphere, throughput, and customer satisfaction, which ultimately means hiring more staff and improving digital use.

While there is cause for concern in the near term, the long-term result will likely resemble Niccol’s impact on Chipotle Mexican Grill, as shown in his previous posting.

He took over that business in 2018, when the stock was trading at a split-adjusted $5, and helped it rise by over 1100% at its peak in 2024. 

Starbucks: Greenshoots Appear as Turnaround Begins to Gain Traction

Starbucks did not have a stellar quarter, with tepid, 3% FX-neutral growth driven entirely by an increase in store count, and it fell short of MarketBeat’s reported consensus estimate. However, sequential improvement was seen in the North American comps, and comps were positive in International markets as traffic improved and visit times increased.

Globally, comps were down 1% on a 2% YOY decline in transactions offset by a 1% increase in ticket average. Regionally, North America grew by 1.5% on a 3.1% increase in stores, while the International business grew by a stronger 6.2%. 

• The store count is up 6.1% YOY at the end of the second quarter and is expected to continue growing over time. Starbucks targets another 100% growth in store count relative to the Q2 total. 

Margin is the area of most concern to the analyst. The company’s operating margin contracted by 450 basis points to 8.2%, deeply cutting into earnings. However, the contraction is due to the accelerating rollout of Green Apron operations, which includes increased staff and technological advancements that are reducing wait times.

Niccol believes the margin will recover over time as turnaround expenses decline and the positive impacts of increased traffic and higher check averages are realized. 

“My optimism has turned into confidence that our 'Back to Starbucks' plan is the right strategy to turn the business around and to unlock opportunities ahead,” commented Brian Niccol … “We are on track, and if anything, I see more opportunity than I imagined.”

Analysts' Sentiment Pressures Starbucks Stock to Long-Term Lows

The analysts remain hopeful that Starbucks' turnaround will continue to bear fruit, but have entered a wait-and-see mode due to margin contraction and macroeconomic headwinds. The post-release activity includes a downgrade to Hold from Moderate Buy, and several price target reductions, which caused the consensus target to decline.

The downturn in sentiment will weigh on the market in the near term but set it up for a substantial rebound when the outlook brightens. That could be as soon as the next quarter, when the FQ3 results are released. 

Starbucks’ stock price fell sharply following the release, but even so, it is giving a bullish signal. The market fell to nearly $75 and rebounded from the early low, showing support at a critical level.

Assuming the market follows through on this signal, the SBUX stock price is at its bottom and could start to rebound before the summer begins. The critical resistance is near $77.50, and it is the midpoint of a well-established trading range. If not, this retail stock could retreat to the $70 level before hitting bottom and rebounding.