Starbucks Fails At Reversing Declining Sales

On Wednesday, Starbucks SBUX released preliminary fourth quarter results that fell short of estimates as weak U.S. demand resulted in declines in same store sales, net revenue and profit. Upon the release that showed same-store sales continued to decline for the third consecutive quarter, shares of the world’s best-known coffee chain fell more than 3% in extended trading. The newly appointed CEO who was also the former CEO of Chipotle Mexican Grill, Inc. CMG, Brian Niccol has embarked on a turnaround journey in an effort to return Starbucks to growth. 

Fourth Quarter Highlights

For the quarter ended on September 29th, the coffee chain reported global comparable store sales fell by 7% which is steepest drop that the coffee chain posted since the Covid-19 pandemic that wreaked havoc on its business.

Specifically, its home U.S. market experienced a comparable sales drop of 6% while its second biggest market, China, plummeted with sales tanking 14%. The U.S. decline was largely owed to a 10% drop in comparable transactions, which was partially offset by a 4% rise in average ticket size. With U.S. traffic tumbling 10%, it’s clear that increased investments in the business that involved increasing the frequency of promotions in its mobile app as well as an expanded range of product offerings, did not do the trick as rising costs of living squeezed consumer budgets, especially in China where sales were also weighed down by intensified competition.

Overall, consolidated net sales fell 3% to $9.1 billion, coming short of LSEG’s consensus estimate of $9.38 billion, while on-GAAP earnings per share declined 24% on a constant currency basis, coming in at $0.80. LSEG expected earnings per share of $1.03.

A suspended outlook as the perennial coffee leader is in for a much-needed turnaround.

Starbucks suspended its guidance for the upcoming fiscal year as Niccol works to revamp the company amid melting demand for its higher-priced offerings. Niccol made it clear that the strategy needs to be fundamentally changed, which is how “Back to Starbucks’ plan aims to get Starbucks back to growth. Niccol provided more details of the plan such as simplifying its "overly complex menu" and adjusting the "pricing architecture." In an effort to reassure investors about its turnaround plan after a dismal quarter, Starbucks raised its quarterly dividend to 61 cents per share, up from 57 cents. Fourth quarter earnings call has been scheduled for October 30th. 

Shortly after taking the helm in a surprising appointment, Niccol is already shaking things up.

Niccol is already changing its marketing strategy fundamentally by refocusing on all Starbucks customers, as opposed to prioritizing members of its loyalty program. Niccol believes problems are very fixable and that Starbucks has significant strengths to build upon. As Niccol embarks on the journey of fixing the sales slump, his first stop is the home market, trying to fix the struggling U.S. business. Niccol’s approach involves aiming to improve the barista experience, morning service, the cafes and last, but certainly not least, Starbucks’ branding.  The former Chipotle CEO is bringing a former Chipotle executive, Tressie Lieberman, on board to deal specifically with this task. The former Chipotle executive has gained a newly created position at Starbucks as Lieberman comes on board as global chief brand officer.

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