We’re increasing our price target on Starbucks after CEO Brian Niccol shows signs of progress

Starbucks reported better than expected quarterly results Tuesday evening — initially sending shares higher in choppy after-hours trading. Even though the company’s same-store sales declined for the fourth straight quarter, early signs of progress on CEO Brian Niccol’s Back to Starbucks strategy had us feeling encouraged that much better times are ahead. Revenue fell 0.3% year over year to $9.4 billion in the fiscal 2025 first quarter, beating the $9.3 billion expected by analysts, according to LSEG. Adjusted earnings per share (EPS) of 69 cents fell 23% year over year, exceeding estimates by 2 cents, LSEG data showed. SBUX 1Y mountain Starbucks’ share price over the past 12 months. Bottom line Coming into the quarter, investors knew the results weren’t going to look good on paper because fixing Starbucks is no quick and easy task. We know that Niccol, who became CEO of the coffee giant on Sept. 9 , is a turnaround artist with an exceptional track record of revitalizing brands. He did it at Taco Bell and most recently at Chipotle. But reputation alone is what caused Starbucks to jump from the mid-$70s to the $90s when his hiring was announced in August. To get the stock higher, the market was hungry for data points that showed Starbucks was on its way to restoring growth in U.S. same-store sales, or comps. The market needed to see signs of progress in the company’s strategy. Here are some highlights from the call. One tangible sign of success was the sequential sales improvement made throughout the quarter. Niccol attributed some of this accomplishment to his pivot away from discounting menu pricing and using those dollars to reinvest in the brand, leaning into broad-based marketing that highlighted the premium experience you get in the stores. Little changes can go a long way, too. Starbucks saw a positive reception from its decision to bring back condiment bars in the U.S., reintroduce ceramic mugs for a more upscale in-store feel, and handwritten notes on cups to enhance the cafe experience. Starbucks (SBUX) Why we own it: Starbucks has one of the most recognizable brands of any restaurant. But over the last few years, operations have been challenged by store inefficiencies and a slow recovery in China. Under the leadership of turnaround artist Brian Niccol, we expect operations will improve and return to growth. Competitors: Dunkin, McDonald’s, Panera, Dutch Bros. Initiation date: Aug. 22, 2022 Portfolio weight: 3.02% Most recent buy: July, 29, 2024 Another data point Niccol cited was the recovery in U.S. category share among quick service restaurants following two straight quarters of declines. “These things tell us our actions are resonating with customers. Progress like this shows me that the Starbucks brand is still resilient and strong and that we have significant future potential,” Niccol explained. “More importantly, it shows that we can sell more of our core beverages simply by demonstrating our premium value.” As for new opportunities, Niccol believes there are throughput gains to be had by fixing the mobile ordering system and putting in place a better order prioritization algorithm. We’ve been critical in the past of how Starbucks’s old regime got carried away with too many menu customization options. It was way too complex. It’s no wonder the company struggled with throughput. That’s why we were pleased to see management announce plans Tuesday evening to reduce its beverage and food stock-keeping units, or SKUs, by roughly 30% by the end of its 2025 fiscal year. It’s also positive to hear that this turnaround program isn’t all over the place and is constantly in flux. The last thing we want to hear is a strategy that needs to reinvent itself. Niccol emphasized on the conference call there is a clear plan to get the business back to growing again despite near-term challenges and he understands the necessary work. Were the results exactly what we wanted? The answer is no. In the quarters ahead, we’d like to see U.S. transaction growth improve faster so that the company doesn’t need to rely so much on ticket, or price, to grow its revenues. However, there’s enough here that proves management has the company on the right path. Although this plan is still in the very early innings and there are plenty of challenges ahead, improvements are being made. For that reason, we are increasing our price target to $115 a share from $100 and reiterating our 1 rating. Quarterly commentary By region, North America net sales were slightly better than expected thanks to a smaller drop in comparable-store sales than estimated. In the U.S., which makes up the bulk of North America, net revenues dipped 1%, to $6.6 billion, despite the store count increasing 4%. Although comparable sales fell 4% due to an 8% decline in transactions, that was partially offset by a 4% increase in tickets. The results represented a slight improvement from the quarter before when transactions were down 10%, partially offset by a 4% increase in tickets. Where the improvement was most evident was in the morning daypart, with growth in non-Starbucks Rewards customers. That’s encouraging because Niccol is trying to broaden Starbucks’ appeal and get more infrequent customers back. But there was also growth in the company’s active U.S. Starbucks Rewards membership program, which increased to 34.6 million from 33.8 million one quarter ago. Turning to International, the decline in comparable-store sales also was not as bad as expected. In China, net revenues improved 1% year over year, to $744 million, thanks in part to a 10% increase in stores. However, comparable-store sales fell 6% due to a 2% decline in transactions and a 4% drop in tickets. During the conference call, Niccol said he traveled to the region last week to make his first market visit. While there, he said he saw the strength of the brand and how dynamic the market is. He said he saw “several” near-term changes the business can make to stabilize operations, but he’ll continue to explore strategic partnerships to get the business back on growth. We continue to believe that while the China coffee market is tough and pricing is competitive, Niccol will do what’s best for shareholders. Outlook The company’s guidance for its full fiscal year 2025 remains suspended, but CFO Rachel Ruggeri provided some details on how they are thinking about the rest of the year. Ruggeri expects earnings per share in the second quarter to be the lowest of the year, in line with analyst expectations, due to seasonality, organization restructuring, and increased investments. The stepped-up spending is going toward coverage hours and wages to support a service model of a four-minute wait time, as well as marketing. Earnings per share are then expected to improve in the second half of the year on both a sequential and year-over-year basis. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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