Starbucks CEO Brian Niccol promises a return to glory days: Opening Bid top takeaway

Yahoo

4 days ago

It's Federal Reserve interest rate decision day, with a side of earnings season madness.
The Fed is widely expected to leave interest rates unchanged. Chairman Jerome Powell — under pressure from President Trump — will undertake arguably his most important press conference after the decision.
Investors will be keyed in on whether Powell signals a rate cut at the September meeting. If he doesn't, pros say stocks could pull back a bit from records. Attention will then turn to the Fed's Jackson Hole Economic Symposium on August 21-23.
"The gap between the July and September meetings is the longest in the Fed's calendar of eight FOMC meetings per year. The long gap between July and September meetings means the Fed will see several months' worth of additional data and have plenty of opportunity to signal its intent in advance," Morgan Stanley chief US economist Michael Gapen said.
Gapen continues to expect no rate cuts this year.
Meanwhile, markets are readying to digest earnings from Microsoft (MSFT) and Meta (META) after market close. Following strong earnings from Alphabet (GOOG, GOOGL), ServiceNow (NOW), and Netflix (NFLX), expectations are sky-high.
However, it's the positive reaction in Starbucks (SBUX) shares that deserves a quick zoom in.
Zoom in: Starbucks earnings lacked hype
The Starbucks earnings release last night was tough on the eyes.
It read as a giant in the middle of a major restructuring. Under CEO Brian Niccol — who's nearing the one-year mark as CEO — that reset has included bringing back condiment bars, retraining employees, rebuilding menu innovation, recasting the brand on TV, and figuring out the struggling China business.
The toll of this investment period was evident in the quarter:
Operating profit margins crashed in every business segment year over year.
Overall operating margins plunged 660 basis points from a year ago.
US same-store sales fell 2% on the back of a 4% traffic drop.
EPS tanked 46% from a year ago.
No guidance provided.
"Unfortunately, I think there were some choices made before me that really set us back on our ability to create that great customer connection between our barista and customer and provide the type of customer service that the Starbucks brand, frankly, is known for," Niccol told me on Yahoo Finance's Opening Bid (watch above).
Yet, investors are clinging to the positives Niccol noted during the earnings call. They include low double-digit percentage same-store sales growth at college locations, improved transaction trends in the US toward the end of the quarter, and a "wave" of beverage and food innovation over the next 12 months. It will also spend $500 million during the next year on increased labor investments — shy of Street whispers of about $1 billion.
The company even teased the potential to reach peak operating margins again.
"The valuation is steep, and we expect an uneven stock appreciation path, linked to traffic fluctuation. Yet, the initiatives in place make us optimistic that Starbucks will return to its past glory and deliver outsized returns to patient investors," Bernstein analyst Danilo Gargiulo said.
Gargiulo reiterated an Outperform rating on Starbucks shares.
The steep valuation — Starbucks boasts a forward P/E of 32 times — reflects hope that Niccol will bring back its past success. I get the optimism — I've covered Niccol since his days leading Taco Bell (YUM) and Chipotle (CMG). He knows his stuff and is probably the best restaurant CEO in the game.
But at this point, investors should be questioning when the inflection moment is in Starbucks' business. It wasn't in the just-completed quarter. It will unlikely be the current quarter. Mix in the threat of high tariffs on coffee beans and cautious US consumers, and one has to wonder if the positive reaction to Starbucks' earnings is really correct.
And if the valuation on the stock is too ... caffeinated.
"We do believe we have the ability to get back to the performance we had pre-COVID. And we've really kind of used 2019 as kind of the guidepost of what we believe we should be back to earning from a financial standpoint," Niccol said.Brian Sozzi is Yahoo Finance's Executive Editor and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email [e-mail].
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