Starbucks Earnings: Initiatives Support Gradual Traffic Improvement Amid Tough Landscape

Key Morningstar Metrics for Starbucks

• Fair Value Estimate: $86.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Starbucks’ Earnings

Given that Starbucks’ SBUX turnaround is in its early stages amid a challenging restaurant landscape, expectations were tempered going into the firm’s fiscal 2025 first-quarter report. Although sales of $9.4 billion were flat and exceeded our $9.3 billion estimate, its earnings per share of $0.69 fell $0.03 short. We don’t anticipate making a material change to our $86 fair value estimate, leaving shares as rich.

While we remain positive about management’s efforts to bolster its brand positioning through in-store investments, process improvements, and menu innovation, we think investors are overly optimistic about the firm’s near-term recovery amid industrywide traffic challenges, heightened promotional activity, and competition from the grocery channel.

Domestically, Starbucks’ 4% comparable sales decline aligned with our expectations, as traffic declines sequentially moderated to 8% in the quarter (from 10%). We surmise a milder decline was supported by strategic initiatives (like eliminating fees for nondairy milk customizations) following prior challenges in engaging its core consumer base. Additionally, nonloyalty member traffic increased, which we attribute to the early impact of a shift toward external advertising, and discounted transactions declined 40% year over year. We view this shift toward brand positioning over discounting as a prudent strategy that reinforces Starbucks’ premium positioning. Alongside efforts to reduce wait times, streamline the menu by eliminating 30% of its offerings, and enhance store environments with renovations (among others), we expect US comparable sales growth to average around 4% over the next decade.

In the quarter, growth initiatives pressured profitability, with the operating margin down 380 basis points to 11.9%, below our 12.6% estimate. While investments to maximize efficiency will likely weigh on near-term margin performance, we continue to see expansion to around 18% in 2034 from 15% in 2024.