Starbucks pares its loss as turnaround hopes offset the FQ4 earnings shocker

Starbucks Corporation (NASDAQ:SBUX) is in the spotlight after jolting investors by suspending its forecast through the next fiscal year as new CEO Brian Niccol looks to turn around the coffee giant. The Seattle-based company also issued soft preliminary Q4 results. Starbucks (SBUX) now expects comparable sales to decline 6% in the U.S. and 14% in China for the quarter that ended on September 29.

Looking ahead, CEO Brian Niccol, the former Chipotle (CMG) boss who joined Starbucks last month, said the coffee chain’s problems are very fixable and that it has significant strengths to build on. Niccol said Starbucks (SBUX) needs to improve staffing, remove bottlenecks and simplify operations for its baristas, especially during the morning rush. He also thinks mobile ordering should be refined so it doesn’t overwhelm the café experience, and wants to simplify the overly complex menu.

Niccol: “We are reorienting all our work to ensure we deliver a high-quality hand-crafted beverage, prepared quickly and with care, and handed directly to the customer by our barista. This is the moment of truth. This commitment will drive every decision we make.”

Analyst reactions

Oppenheimer analyst Brian Bittner said Starbuck’s (SBUX) earnings preannouncement highlights the reality of the challenging road ahead, with U.S. traffic -10% Y/Y, China same-store sales down -14% and EPS -24% to $0.80 vs. the consensus expectation of $1.03. Bittner said Starbucks (SBUX) CEO Brian Niccol’s initial areas of focus appear to center around refreshed marketing, menu simplification, addressing price/value, improving operations, and improving employee culture. The firm kept a Perform rating in place on SBUX.

TD Cowen was positive on the set-up for Starbucks (SBUX) as it kept a Buy rating on the restaurant stock. “New CEO BrianNiccol is acting with a sense of urgency to stabilize the business,” highlighted analyst Andrew Charles. “We believe the strategic plan is coming together,” he added.

BTIG also kept a Buy rating on Starbucks. “While some investors may be disappointed by the decision to suspend (or not provide) guidance for fiscal 2025, we believe it is the right decision while the turnaround plan is being formulated,” updated analyst Peter Saleh.

TD Cowen analyst Andrew Charles said the firm’s quick franchisee checks suggested McDonald’s (MCD) is on top of the issue and that it seems largely contained. Charles said it is only natural to expect a short-term impact on sales. Based on the food contamination analogies of Chipotle (CMG) in 2015 and Jack in the Box (JACK) in 1993, Charles and his team estimate that every 1% annualized change in U.S. same-store sales will lead to a $0.09 EPS impact. TD Cowen sees a worst-case scenario hit to Q4 EPS of $0.37.

On Seeking Alpha, analyst Luca Socci recommended that investors stay out of Starbucks (SBUX) until it is clearer that Niccol has been able to ignite the long-awaited turnaround.

Shares of Starbucks (SBUX) were down 0.20% in afternoon trading after paring a larger decline when the preliminary earnings results were first released.