Brewing a Caffeinated Comeback: How Bold Are Starbucks' Turnaround Bets?

Coffee chain titan Starbucks (NASDAQ: SBUX) just released a preliminary report for the fourth quarter of 2024. Sales are coming in lower than expected due to fewer (but more profitable) transactions. The newly installed management team under food service turnaround expert Brian Niccol canceled their full-year guidance targets and said there won't be any firm financial targets for the next fiscal year.

At the same time, CFO Rachel Ruggeri noted that a turnaround plan that includes some cost-cutting moves is already underway, and will be further explained in next week's full earnings report.

So Starbucks is getting back to the basics of running a coffee shop. While waiting for a fuller overview next week, let's see what's new in the company's preliminary report.

Declining sales and strategic shifts

Starbucks saw same-store sales fall 7% year over year on a global level. The large and important Chinese market showed a deeper same-store sales drop of 14% amid tighter competition and a weakening Chinese consumer market. In North America, comparable-store foot traffic declined by 10% while the average ticker price rose by 4%. All in all, Starbucks' total sales are down 3% and earnings fell 24.5% below the year-ago period's tally.

Niccol's commentary for this early look at the fourth-quarter results didn't provide much color commentary about the financial results. Instead, he focused on the turnaround effort and what Starbucks is doing to get back on track.

It's not exactly rocket surgery, but a simple return to what made Starbucks great once upon a time. The marketing plan used to focus on members of the Starbucks Rewards loyalty program, but is now more broadly aimed at the general coffee-drinking population. Niccol is simplifying the menu and making the product prices more uniform across different product lines.

"If you stay true to your core identity, take care of customers and your team, simplify the business, deliver consistently high-quality products and experiences, and tell your story effectively, you will be successful," Niccol said in a short video of prepared remarks. "So we have a lot of work ahead of us, but I am confident we can get all these things right at Starbucks."

Fixing the menu and focusing on the customer experience will "remind people of why they love Starbucks," Niccol said. That should motivate them to visit the store more often, rekindling Starbucks' faded business growth. The damaged brand moat can be repaired.

Image source: Getty Images.

Brian Niccol's impact on Starbucks' turnaround

I like Niccol's brand-building mentality. He also comes with a sterling pedigree of successful turnarounds at Chipotle Mexican Grill and two Yum! Brands divisions. This superstar gives Starbucks a serious chance to fire up its stalled growth. In particular, I think it's the right decision to preach a little less to the loyalty-program choir of Starbucks lovers. Reaching out to new groups of potential customers could fix the store traffic issue in a hurry.

This turnaround effort isn't happening in a vacuum, though. Fresh-faced coffee chop rival Dutch Bros (NYSE: BROS) has seen uneven same-store revenue growth in recent quarters and Keurig Dr. Pepper (NASDAQ: KDP) described the U.S. coffee market as "muted" in their second-quarter earnings call. So the stage isn't set for a triumphant rebound, as Starbucks must fight for its brand value in a challenging economy.

On the upside, the inflation crisis is fading out. Consumer confidence is still rather weak but that leaves room for significant improvements. In that light, I'm watching Starbucks' turnaround plan closely. The stock is down 15% in three years despite a large jump related to the hiring of Niccol. The legendary company is struggling, but it's still a cash machine with a valuable brand name and a store chain on global proportions.

I'm tempted to buy a few Starbucks shares at this critical juncture. However, the suspended financial guidance undermines my confidence in the company's turnaround prospects. Let's wait until next week's full earnings release. Waiting for a deeper understanding of the business plan makes more sense than rushing into a speculative investment.

For now, I'd give Starbucks stock a firm "hold" recommendation. Can Niccol reheat the coffee that went cold under the last management team? Wait and see, dear reader.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Dutch Bros and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.