Starbucks Still Needs More Time

Key Points

• Starbucks posted better revenue than investors had expected, but weakness in comparable sales and an earnings shortfall pointed to ongoing challenges for the coffee giant.

• CEO Brian Niccol said that he believes the Starbucks turnaround is actually ahead of schedule.

• Shareholders seem optimistic, but even Niccol warns that investors will likely have to wait until 2026 before seeing dramatic signs of success.

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

Key Metrics

Starbucks Sees Its Turnaround Start to Take Shape

Expectations have been high that Starbucks will eventually be able to recover from an extended period of weakness and return to its former glory. Yet although those hopes are still there, shareholders will have to stay patient in order to see a true recovery in key business metrics.

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Starbucks' fiscal third-quarter financial report showed mixed results. Revenue climbed 4% globally, including a 2% rise in North America and a 9% boost in the coffee company's international segment. However, comparable sales were down 2% globally, with a 2% drop in North America offsetting flat comps internationally. Earnings were down by nearly half, as the company cited inflation, labor costs, and the expenses associated with the Back to Starbucks initiative.

CEO Brian Niccol urged investors to remain confident. Based on his prior experience in dealing with companies that are turning themselves around, Niccol believes that Starbucks is "ahead of schedule" after having "fixed a lot and done the hard work on the hard things" to get started. Niccol told shareholders to expect a "wave of innovation" next year that should accelerate growth, bring back top customer service, and make the Starbucks experience something to celebrate again.

Immediate Market Reaction

For their part, Starbucks investors seemed willing to accept Niccol at his word. The stock was up 5% in after-hours trading late Tuesday following the coffee company's quarterly release. Even though Starbucks' earnings miss could potentially have caused problems in investor sentiment, it appears that the company's CEO was successful in buying some extra time for Starbucks to make further progress in its turnaround efforts.

What to Watch

China was a bit of a bright spot again for Starbucks, with comps climbing 2% year over year. That reversed a serious tailspin for the coffee giant in the East Asian nation in last year's period, and over the past 12 months, Starbucks has opened more than 500 new locations in China.

With Niccol essentially asking for leeway until next year before being fully accountable for the success of his turnaround efforts, Starbucks shareholders might not get the answers they want as soon as they want them. For now, investors seem willing to be patient. How long that will last, though, is anyone's guess.

Helpful Resources

• Full earnings report
• 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.