SBUX Q1 Earnings Call: Turnaround Efforts Prioritized as Sales Miss Expectations

Coffeehouse chain Starbucks (NASDAQ: SBUX) missed Wall Street’s revenue expectations in Q1 CY2025 as sales rose 2.3% year on year to $8.76 billion. Its non-GAAP profit of $0.41 per share was 15.2% below analysts’ consensus estimates.

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StockStory’s Take

Starbucks' first quarter results reflected ongoing challenges as the company reported revenue and profit below Wall Street expectations. Management attributed performance to continued investments in its "Back to Starbucks" turnaround plan, which focuses on improving store operations, enhancing the customer experience, and resetting the cost structure. CEO Brian Niccol noted that early signs of progress are visible, particularly in North America, but acknowledged that financial performance remains below the company’s potential at this stage of the turnaround.

Looking ahead, Starbucks leadership emphasized patience, stating that the turnaround will take time to fully translate into improved financial outcomes. CFO Cathy Smith highlighted a focus on disciplined investment and cost management, with an intention to balance near-term operational challenges with long-term growth opportunities. Management refrained from providing detailed financial guidance, citing the ongoing nature of strategic changes and the need for further progress before offering a more specific outlook.

Key Insights from Management’s Remarks

Management highlighted several company-specific operational and strategic initiatives that shaped the quarter’s results and are intended to drive longer-term improvements. Key themes included operational resets, labor investments, market-specific adjustments, and a renewed focus on customer experience.

• Labor Investment and Service Model: Starbucks prioritized investing in store labor and a new "green apron" service model over equipment upgrades, targeting improved throughput, customer connection, and transaction growth. This approach was piloted in hundreds of stores and is being scaled nationwide.
• Menu Simplification and Innovation: The company continued to simplify its menu, removing slower-selling items to focus on core coffee offerings and new platforms such as the Cortado and matcha beverages. These changes are designed to enable more impactful product innovation and operational efficiency.
• Store Portfolio and Cost Reset: Management acknowledged rising costs in new store builds and renovations and is temporarily slowing unit growth to focus on reducing build costs and improving store economics before ramping expansion.
• Marketing and Brand Repositioning: A multi-channel brand campaign and menu innovation drove higher engagement, especially among non-loyalty customers. Management pointed to improvements in brand perception and customer preference as evidence of early impact.
• International Market Adjustments: The company cited positive comp sales in eight of its top ten international markets, with tailored product launches and local marketing, particularly in Canada, the UK, Japan, and China, supporting recovery and growth.

Drivers of Future Performance

Starbucks’ outlook centers on scaling operational changes, managing cost headwinds, and adapting to consumer sentiment, with management focused on long-term growth and margin recovery as the turnaround progresses.

• Operational Efficiency Initiatives: The rollout of new labor models, order sequencing technology, and menu simplification is expected to gradually improve transaction trends and customer satisfaction as these programs reach more stores.
• Margin Pressures and Cost Management: Margin recovery will depend on balancing increased labor investments with reductions in store build costs, supply chain adjustments due to tariffs, and the impact of commodity prices, particularly coffee.
• Consumer and Market Dynamics: Management cited uncertainty in consumer demand and macroeconomic conditions as ongoing risks, but believes that store experience improvements and targeted marketing can help offset external headwinds.

Top Analyst Questions

• David Palmer (Evercore ISI): Asked how shifting from equipment investment to labor and technology would impact store-level costs and rollout speed. Management confirmed the approach allows for faster deployment with cost discipline, but said it was too early to quantify the financial impact.
• Sara Senatore (Bank of America): Questioned whether labor investments would permanently alter store economics and margin profile. CEO Brian Niccol stated the strategy aims for higher-quality, non-discount-driven transactions and expects margins to recover as growth returns.
• David Tarantino (Baird): Sought clarity on the store portfolio review and pace of new unit growth. Management explained that store openings would slow temporarily while design and cost resets are implemented, with expansion to accelerate later.
• Brian Harbour (Morgan Stanley): Asked if menu simplification impacted transactions and how innovation would be sequenced. Management reported improved transaction comps in more stores and described a structured process for introducing new items to ensure operational fit and customer relevance.
• Christine Cho (Goldman Sachs): Inquired about early results from the order sequencing algorithm for mobile and in-store orders. Starbucks cited reduced wait times and improved partner experience in pilot stores, supporting broader rollout.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be closely monitoring (1) the nationwide rollout and operational impact of the green apron service model and order sequencing technology, (2) evidence of margin stabilization as labor investments are scaled and store build costs are reset, and (3) transaction and comp sales trends in key geographies, especially North America and China. The pace and effectiveness of menu innovation and marketing efforts will also be important indicators of progress.

Starbucks currently trades at a forward P/E ratio of 27.2×. At this valuation, is it a buy or sell post earnings? See for yourself in our free research report.

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