Shares of Starbucks (NASDAQ: SBUX) were heading lower today as the coffee chain reported disappointing results in its fiscal second-quarter earnings report last evening, though management said it continued to make progress in its turnaround strategy.
As of 11:30 a.m. ET, the stock was down 7%.
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Starbucks’ struggles continue
Comparable sales declined 1% in the quarter with transactions down 2% and a 1% increase in average ticket. Comparable sales were down 1% in North America, but up 2% in international markets, which included flat comps in China.
Overall revenue in the quarter rose 2.3% to $8.76 billion as the company continues to open new stores, though that was below estimates of $8.83 billion.
Profitability continued to suffer as the company invests in the turnaround, noting that it had abandoned some expansions of cold-brewing equipment to focus on investing in labor instead, where it saw greater potential to improve throughput (fulfilling orders) and connection with customers.
As a result, adjusted operating margin fell 460 basis points to 8.2%, and the company finished the quarter with adjusted EPS of $0.41 down 40% from a year ago, and below the consensus estimate of $0.48.
However, CEO Brian Niccol sounded an optimistic note, saying, “My optimism has turned into confidence that our ‘Back to Starbucks’ plan is the right strategy to turn the business around and to unlock opportunities ahead.”
What’s next for Starbucks?
Starbucks did tout performance on internal metrics like customer satisfaction, and said feedback on the changes it’s made has been overwhelmingly positive.
While comparable sales growth is going in the right direction, it’s still negative, and until it returns to positive growth, it will be hard for investors to fully buy into the turnaround.
However, this is only the second full quarter with Niccol at the helm, and he deserves investor patience while he executes the new strategy. The company also faces similar risks from the trade war and weakening economy that other restaurant chains do.
Overall, the sell-off in the stock is understandable, but it’s too soon to give up on the turnaround.
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Jeremy Bowman has positions in Starbucks. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
