Starbucks (SBUX-Q) shares gave back premarket gains an sat 2 per cent lower in early trading on Wednesday despite the coffee chain’s strong quarterly sales signalling CEO Brian Niccol’s turnaround plan was bearing fruit. A simplified menu and investments in store and labor operations were some of the highlights of Mr. Niccol’s “Back to Starbucks” initiative.
The major brand reset follows several quarters of falling sales.
“It seems like the company is planning to be on offense next year once its new operating model is in place,” Morgan Stanley analysts said.
Mr. Niccol, who took the helm in August, on Tuesday laid out plans to upgrade store design, including a lower-cost “coffee house of the future” aesthetic, and pledged more than half a billion dollars in investments for thousands of stores across the U.S. next year.
“The goal has shifted from an initial ‘Back to Starbucks’ to an appropriately ambitious goal for a ‘Better Starbucks,’ where everyone can experience the best of Starbucks,” J.P. Morgan analysts said in a note.
Tariff uncertainty and elevated inflation have hit U.S. consumer sentiment, forcing some businesses to revamp their strategies.
In Starbucks’ North America market, its largest, quarterly same-store sales dropped 2 per cent, consistent with last year’s decline.
In China, same-store sales increased 2 per cent amid stiff competition from local rivals such as Luckin Coffee and Cotti Coffee.
Starbucks has been exploring options such as strategic partnerships and joint ventures for its China business, which was valued at up to US$10-billion, according to media reports earlier this month.
Following the results, at least seven brokerages raised their price targets on the stock. The company trades at a 12-month forward price-to-earnings ratio of 33.28.
“The turnaround has taken longer than we expected... but the efforts are coalescing and progress is being made. We think once these start working, the impact will be significant and pretty immediate,” BTIG analyst Peter Saleh said.
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