Changing up the menu and improving the ordering process may not be enough to turn things around for Starbucks.
Starbucks (SBUX -0.07%) is in the middle of a significant turnaround effort. The business has been struggling to grow its sales in recent quarters, and that has created worry among investors. The situation has been concerning enough that the company has brought on a new CEO, Brian Niccol, who is looking to get Starbucks back on the right path.
While the stock surged earlier this year on news that Niccol was joining the company and leaving Chipotle Mexican Grill to do so, a change in leadership doesn’t mean that it’s going to be smooth sailing for Starbucks. In fact, there are signs that this could be a considerable challenge, even for Niccol. And you don’t have to look much further than the company’s recent earnings numbers for evidence of that.
Starbucks’ turnaround may not be quick or easy
While new CEO Niccol is attracting a lot of attention from investors these days, it’s what the company’s chief financial officer, Rachel Ruggeri, said recently that shouldn’t go unnoticed. Ruggeri suggested when discussing the company’s latest quarterly results that the company is having some challenges in turning things around. “Despite our heightened investments, we were unable to change the trajectory of our traffic decline.”
There have been complaints that the ordering process at Starbucks hasn’t been ideal and that perhaps the environment isn’t as welcoming as it was in the past. Niccol is also focused on simplifying Starbucks’ menu. There are opportunities for improvement, but the big takeaway from the CFO is that there doesn’t appear to be an easy fix here. Ruggeri says that “we are developing a plan to turn around our business, but it will take time.”
Guidance suspended and plenty of uncertainty ahead
In another sign that management is uncertain of the path forward, Starbucks also announced that it was suspending its guidance for fiscal 2025, which ends in September. For the most recent quarter, which ended on Sept. 29, the company’s global comparable store sales declined by 7% — that’s even worse than the 3% decline Starbucks reported a quarter earlier.
Changing the ordering process and simplifying the menu may not be enough to fix Starbucks’ problems. And with the company being a large global brand, there are many geopolitical factors to consider as well. The conflict in the Middle East, for example, has been a reason for some consumers to boycott the coffee company for its perceived connections to Israel. And in China, Starbucks faces growing competition and pricing pressure.
Niccol had success with Chipotle and in helping the company become the growth machine that it is today, but Starbucks is a much larger and broader business, with more complexities to consider.
Should you invest in Starbucks stock?
For years, Starbucks has enjoyed a strong and loyal following. But lately, that loyalty appears to be waning, especially as consumers face rising costs. Even if the company’s efforts can lead to improvements in its growth rate in the U.S., Starbucks may face bigger problems in other markets, which could limit the effect of the changes it plans to make.
The challenges the business is facing suggest the stock should be trading at a steep discount given the uncertainty ahead. At a multiple of 27 times earnings, however, the stock looks far too expensive, as it leaves little to no margin of safety for investors who buy it today; a turnaround is by no means a certainty, and investors look to be pricing that into the current valuation.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
