When it was announced that former Chipotle CEO, Brian Niccol, would become the new head of Starbucks (SBUX 0.43%), the coffee giant's stock price shot up a staggering 24.5% in a single-trading session.
But Starbucks stock has barely moved in the past few months as investors digest what the leadership change means for the struggling company that, even after the gain, is still roughly the same price today as it was four years ago.
The company's fourth-quarter fiscal 2024 earnings results were terrible, but Niccol's commentary in shareholder letters and on the earnings call included a flurry of new strategies that could mean better days ahead for the beverage behemoth.
Here's where Starbucks could be headed and if the dividend stock is a buy now.
Image source: Getty Images.
Back to its roots
Starbucks rose to international stardom by making handcrafted espresso drinks accessible and by expanding everyday options beyond weaker, lower-quality coffee. A key part of Starbucks' success was offering customers a "third place," or a location away from home and work to relax. To make the third place desirable, Starbucks popularized high-speed internet cafes, a diverse coffee and tea menu, and a culture built around quality and knowledgeable baristas.
In recent years, Starbucks has shifted somewhat away from these core values to focus more on speed. It had become more transactional in nature. Mobile ordering, paired with the rise of the Starbucks Rewards program and the Starbucks app, brought untold convenience that allowed coffee drinkers to bypass long lines. The innovation is still a net positive for the company, but there have been downsides, too. Most notably, the culture of Starbucks took a big hit, especially on the disgruntled-employee front with baristas pressured to process high volumes of transactions. Over time, Starbucks became more like a factory than a cozy destination away from home and work. And with high-speed internet now available in homes and Starbucks becoming more transactional, there was less reason to hang out at Starbucks.
No company can ever get back to the way it was. But Starbucks can make the necessary moves to preserve the advantages of mobile ordering while improving the partner (Starbucks employee) and customer experience. Many of Niccol's new strategies seem to embody this vision.
A new direction
Here are some of the biggest strategic changes Starbucks mentioned on the earnings call:
- Better staffing to reduce partner turnover.
- Ensuring there is enough staff during peak hours.
- Adjusting Mobile Order and Pay to avoid overwhelming partners during peak hours.
- Bringing back condiment coffee bars at all cafes by early 2025, so that customers can customize their drinks and be less reliant on baristas.
- Cutting back on an overly complex menu.
- Investing in equipment and processes to improve the in-store experience.
- Eliminating the upcharge for nondairy milk options at company-owned and operated stores in North America.
- Pausing price increases at company-owned and operated stores in North America through at least fiscal 2025.
On top of these changes, Niccol is taking a page out of Starbucks founder Howard Schultz's book by prioritizing the importance of a third place in today's modern world. Niccol said the following on the earnings call:
We're reclaiming the third place, so our cafes feel like the welcoming coffee house our customers remember. In the coming months, we intend to reintroduce more personal touches to elevate the cafe experience. For instance, we'll begin to prioritize serving coffee in ceramic mugs for customers who choose to enjoy their coffee in our cafes. We're also beginning to review and revise our cafe designs to bring back more comfortable seating and amenities and to ensure our stores are a place where customers want to sit, work, and eat.
Starbucks' new top brass is not shying away from the company's problems and what it will take to restore it to a more sustainable growth path. But that doesn't mean the stock is a screaming buy now.
A disappointing fiscal year
The following chart showcases Starbucks' weak results in recent years.
SBUX Revenue (Annual) data by YCharts.
Sales growth has been strong, but margins have come down, and earnings are roughly the same as they were before the pandemic. Fiscal 2024 included a 2% global-sales decline, a 4% decline in comparable transactions, and a 6% decline in non-GAAP earnings per share.
The results show that Starbucks' price increases have not been enough to drive meaningful earnings growth. Niccol's understanding that the company needs to focus less on price increases and even reduce prices (such as by eliminating the non-dairy upcharge) means that the company is returning to a customer-first approach even at the expense of near-term results.
Patient investors may want to take a closer look at Starbucks
Turnarounds are never easy, especially when dealing with a massive company with a powerful brand like Starbucks. The huge run-up in the stock price in August on news that Niccol was taking over as CEO priced in that the worst was over for Starbucks. When in reality, the company still needs to prove that its strategic changes can translate to meaningful-earnings growth.
Still, Starbucks looks like a decent buy now. The valuation isn't bad, with a 29.3 price-to-earnings (P/E) ratio, especially considering the earnings that factor into that P/E aren't great. What's more, Starbucks has a solid-dividend yield of 2.5% and just raised its dividend for the 14th consecutive year.
For the first time in years, Starbucks has become an exciting investment opportunity based on future growth instead of just an income and value play. Folks who are especially confident about the changes may want to consider buying the stock now, whereas other investors may be better off waiting a little bit to gauge the effectiveness of management's new strategies.
