By Waylon Cunningham
NEW YORK, April 29 (Reuters) - Starbucks posted its strongest quarterly sales growth in two and a half years on Tuesday, but as costs rise faster under CEO Brian Niccol’s turnaround strategy, questions remain as to how quickly profit margins can recover.
The surge in sales drove a nearly 9% rise in Starbucks share price on Wednesday, but longer term, analysts say that faith in Niccol’s ability to recapture margins – not just sales -- is a key reason why Starbucks shares trade at a premium
to peers.
The company says the quarter is a milestone in the company’s turnaround under Niccol.
“We said we will grow the top line first, and margin and earnings growth would follow,” Starbucks international segment head Brady Brewer told investors. “Q2 is proof our strategy is working.”
In North America, Starbucks’ core market, the world's largest coffee chain reported a 7.1% increase in same‑store sales for the second quarter and a 9.9% operating margin, slightly short of some Wall Street expectations.
Two years ago – just a few months before Niccol took the company’s top job – sales growth in the same region was negative, but operating margins were nearly twice as wide at 18%.
"We're increasingly focused on North America margins over the coming quarters," wrote analysts at UBS on Wednesday.
The company said it expects some margin pressure related to import tariffs and coffee prices to alleviate in the second half of the year.
The biggest culprit for the compressed margins in North America is Niccol’s investments in additional staffing, a key pillar of his “Back to Starbucks” strategy aimed at improving customers' experiences at the chain’s coffeehouses. The company said earlier this month that it had invested more than $500 million in additional staffing since the turnaround began.
Chief Financial Officer Cathy Smith told investors that those staffing levels will remain in the long term, “especially as we continue to drive more and more demand.”
Analysts, on their call with executives on Tuesday, flagged that even as the company significantly raised its sales outlook for the year, its increased earnings per share outlook was not as robust.
“Our earnings flow through in time,” Smith told the analysts, attributing the conservative profit outlook in part to uncertainty about broader economic trends.
Customer traffic increased across all income cohorts in the quarter, management said, attributing the rise to Niccol’s operational changes.
"The recovery is notable for its breadth, indicating the turnaround is structurally sound rather than dependent on a specific group," analysts at Stifel said.
Niccol's turnaround strategy, called "Back to Starbucks," has focused on improving measures on wait times and reported customer satisfaction.
When Niccol took the company’s top job in September 2024, a narrow majority of analysts recommended buying Starbucks stock, but only about four in 10 do today, according to LSEG data.
Analysts at RBC Capital Markets, which downgraded its rating of Starbucks last month but raised its price target after the results, wrote on Wednesday that questions remain around the durability of sales growth and margin improvement beyond next fiscal year.
(Reporting by Waylon Cunningham; Editing by Anna Driver)
