Starbucks Serves Up Lukewarm Results

Here's our initial take on Starbucks' (NASDAQ: SBUX) fiscal second-quarter financial report.

Key Metrics

Grinding Through a Turnaround

Starbucks' fiscal second-quarter report for the period ended March 30 didn't give investors everything they had hoped to see. Overall revenue gains of 2.3% fell about $70 million short of the consensus forecast among those following the coffee chain. Similarly, the 40% plunge in adjusted earnings was fully $0.07 per share worse than most had anticipated.

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A look beyond the headline numbers showed other concerns. Global comparable sales were down 1%, as a 2% drop in the number of transactions outweighed a 1% rise in the average consumer's ticket. The 4% drop in North American transaction counts led to a similar 1% fall in North American comps. International comps were a bright spot, rising 2% on a 3% rise in transaction counts, but China's comps were flat.

One big problem that Starbucks struggled through was a 12% rise in store operating expenses, which was a key contributor in sending operating expenses up 9% year over year. The coffee chain operator blamed restructuring costs and expenses related to the Back to Starbucks initiative, which involved the reduction of 1,100 workers along with the elimination of several hundred open and unfilled positions within the company.

Immediate Market Reaction

Starbucks investors seemed prepared for the less-than-stellar news. Shares initially dropped as much as 2%, but by the end of the first half-hour of after-hours trading following its release of quarterly results, shares had clawed back their losses and were close to unchanged.

Some of that muted response might well have stemmed from the fact that shares had fallen more than 25% since the end of February. A combination of tariff concerns and broader macroeconomic worries contributed to the weakness.

What to Watch

Unfortunately, the geopolitical picture hasn't gotten much clearer in the past several weeks since President Donald Trump announced the latest tariffs on China. Niccol believes that Starbucks is not only on track but bound for even better things than he originally expected. However, it's hard to see the light at the end of the tunnel when financial performance is seeing sharp year-over-year declines.

Given the stock's resiliency, shareholders seem willing to be patient a while longer. At some point, though, that patience will wear thin. Starbucks had better be able to show its investors more tangible results from its turnaround efforts before that happens.

Helpful Resources

• Full earnings release
• Investor relations page

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Dan Caplinger has positions in Starbucks. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.