Starbucks’ CEO-Led Turnaround Gains Traction: New Highs Likely

Key Points

• With Brian Niccol in charge, Starbucks' CEO-led turnaround is gaining traction, and the outlook brightens. 
• Q1 results were not spectacular, but they aligned with the outlook that growth would resume in Q2 and earnings quality would improve by the end of the year.
• Analysts are raising their price targets and suggest a move to a new all-time high is possible this year.  

Starbucks' NASDAQ: SBUX outlook is improving, with Brian Niccol at the helm, and new all-time highs will likely be achieved by the end of this year. Now, more than a full quarter into the transition, the signs are clear that he was the right choice. His efforts include refocusing on the core in-store business, improving the in-store customer experience, and alleviating the disruptive onslaught of digital orders. 

Ironically, unlike Chipotle Mexican Grill NYSE: CMG, where his job was to invigorate digital channels, Starbucks’ in-store experience has suffered due to the prioritization of digital channels. Today's job is to smooth the impact of digital, which means simplifying the menu and algorithmically sequencing the online orders to fit smoothly into the in-store flow. The goal is to improve store flow-through and the customer experience, invigorate store traffic and sales, and sustainably improve margin. 

The Bottom Is in For Starbucks' Business Contraction

Starbucks's FQ1 2025 results were not spectacular but better than expected, confirming that last year was the bottom in contraction. The company’s net revenue of $9.4 billion is down slightly compared to the previous year. Still, it is nearly 100 basis points better than MarketBeat’s reported consensus, with revenue growth expected in Q2 and for the year. 

Comp-store sales are down 4% globally, with a 4% contraction in the U.S. and International segments, while the store count rose by 5%. Comp-store weakness is due to declining transactions, which is not a good sign, but it is offset by sequential improvement in the U.S. segment and a promising outlook that includes increased store-count leverage. The company will have an expanded store count when it resumes comp-store growth. Loyalty membership is also up, reinforcing the outlook for improving and accelerating sales growth in 2025.

The margin news is mixed. Deleveraging and increased investment shaved 390 basis points off the operating margin. However, the contraction is less than forecast, mainly due to investment in the Back to Starbucks campaign, including wages, incentives, and increased hours. The expanded hours are central to the turnaround effort and aim to improve flow-through at peak times. 

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Guidance remains suspended, but CFO comments suggest that Q2 will be the trough in earnings, and growth will resume in the back half. The comments aligned with the analysts’ forecasts, which assumed 3.5% revenue growth for the year with a 20% earnings contraction in Q2 and better results in the back half. The odds are high that analysts' forecasts are too low because of Niccol’s efforts to improve the flow-through and the potential for increasing business momentum as the turnaround gains traction. In this scenario, investors can look forward to a sustained analyst upgrade/revision cycle. 

Starbucks Turnaround Plan Lifts Analysts' Sentiment to New Highs

Starbucks’ analysts responded favorably to the Q1 results and updates, issuing numerous price target increases the morning after the release. MarketBeat tracked revisions from seven firms, including Wedbush, Goldman Sachs, and Barclays, and all of them increased their targets. The consensus of the revisions is a Moderate Buy and 10% to 25% upside for this market. Critical details include a new high target of $125, sufficient for a new all-time high. Even so, the $110 consensus of seven is suitable for a two-year high and 500 basis points above the broader consensus, adding lift to the market. 

Starbucks' stock price rose more than 3.5% in premarket trading after the Q1 report to set a 15-month high. The move puts the market on track to retest critical resistance at the $105 level, which may be reached before the end of CQ1 2025. A move above that level would signal a significant shift in market dynamics and likely result in the retest of all-time highs soon after.