Starbucks' Same-Store Sales Roar Back, But Its Biggest Hurdle Remains

When Starbucks (NASDAQ: SBUX) hired Brian Niccol away from Chipotle to be its new CEO, investors cheered the move. That excitement appears to have been well-founded, as Niccol has been able to turn around the flagging sales at the coffee shop operator.

For the third straight quarter, Starbucks was able to turn in positive and accelerating global same-store sales growth. For its fiscal second quarter, it grew its global same-store sales by a robust 6.2%. Global traffic jumped by 3.8%, while the average ticket rose by 2.3%. After not seeing an increase in traffic for two straight years, Starbucks has now seen two straight quarters of traffic growth.

The company credited its strong sales to menu innovation, calling out its matcha beverages and energy refreshers, as well as new bakery items. It also said that the launch of its customizable cold foam platform has been a big growth driver. In addition, it has continued to remodel stores and increase staffing.

In North America, its largest market, comparable-store sales surged 7.1%, with traffic up 4.4% and pricing up 2.6%. International same-store sales increased by 2.6%, with traffic rising 2.1% and average ticket up 0.5%.

China saw same-store sales edge up 0.5%, with a 2.1% increase in traffic and 1.6% decline in price. The company closed a deal with Boyu Capital after the quarter, selling a 60% interest in the company's China retail operations. As such, this will be the last quarter it breaks out its Chinese results.

Overall revenue jumped 8.8% to $9.53 billion, while its adjusted earnings per share (EPS) climbed 22% to $0.50. The results easily topped analyst expectations for EPS of $0.42 on sales of $9.16 billion, as compiled by LSEG.

The company said that it has seen similar same-store sales growth in April as it did the prior quarter, and it now expects both global and U.S. same-store sales of at least 5% for the fiscal year. It also raised its full-year adjusted EPS guidance from $2.15 to $2.40 to a new range of $2.25 to $2.45.

Image source: The Motley Fool.

A big hurdle remains

Niccol has done a great job turning Starbucks around, with sales greatly improved. However, he faces an even bigger hurdle now in trying to restore the company's operating margins. The company's former CEO understaffed its stores, which helped operating margins but hurt the customer experience and, ultimately, sales.

While overall operating margins did improve in the quarter, this was largely due to held-for-sale accounting treatment for Starbucks China before the JV closed. Looking at just North America, operating margins fell 170 basis points to 10.2%. If you look back to fiscal Q2 2023, its North American operating margins were 19.1%. That's a huge hit to profits.

Restoring operating margins will be the more difficult job for Niccol, which is why I'm not a buyer of the stock, with it trading at a forward price-to-earnings of over 36 times fiscal 2027 estimates. The path to the company getting back to prior earnings levels anytime soon just doesn't look realistic without once again sacrificing the customer experience.

Geoffrey Seiler 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 London Stock Exchange Group Plc and recommends the following options: short June 2026 $36 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.