Starbucks’ (NASDAQ:SBUX) The problems didn’t just disappear when he appointed Brian Niccol as CEO. Chipotle Mexican Grill. This fact reared its ugly head when the company decided to release a snapshot of its weak quarterly results ahead of its actual earnings report.

The stock initially reacted negatively, then recovered to end the day in slightly positive territory. The market movement suggests that investors are willing to give Niccol some time to implement its turnaround plan.

Let’s take a closer look at the coffeehouse operator’s preliminary earnings and Niccol’s comments and see when a rebound could occur.

Things got worse

While Starbucks was in dire straits, things got worse in the fiscal fourth quarter, which ended in late September. One of the biggest measures of brand health same store salesIt shows how well sales are performing in established locations.

For Starbucks, this measurement showed that things were not going well. The company’s overall same-store sales fell 7% in the quarter. Both the USA and China remained the main obstacle to the company. In the US, Starbucks’ same-store sales decreased by 6%.

But even more disturbing is that traffic or similar transactions drop by 10%. This was despite the company increasing promotions to drive traffic to its stores. More frequent in-app promotions and integrated marketing haven’t changed customer behavior, he said. The decrease in traffic was offset somewhat by a 4% increase in the average ticket.

The company said efficiency efforts went as planned but were not enough to overcome traffic declines.

Meanwhile, things were no better in China, its second largest market. Same-store sales in the country fell 14%; There was an 8% decrease in traffic and a 6% decrease in average tickets. Starbucks blamed intense competition and the soft Chinese macro environment for the poor results in the country.

Overall revenue for the quarter fell 3% to $9.1 billion, while adjusted earnings per share (EPS) fell 24% to $0.80. That was well below the $9.4 billion in sales and $1.03 adjusted earnings per share that analysts expected.

In addition to its poor result, the company also announced that it would suspend its 2025 outlook. But to show confidence in its long-term growth, it increased its quarterly dividend by 7% to $0.61.

Image source: Getty Images.

comeback plan

Starbucks’ CEO said he will go into more detail about the steps the company is taking to aid the recovery in its upcoming earnings call. But he debated parts of his plan. He stated that Q4 results showed that Starbucks needed to fundamentally change its strategy. He said the “Return to Starbucks” plan would bring radical change.

Part of this is re-establishing Starbucks as a coffee company first and foremost. He said through marketing and product innovation the company will remind everyone that it is a coffee company.

His next big focus will be on both his employees and customer service. He said the company should give baristas the time and equipment so they can provide the best service to their customers and become one of the best jobs in retail. He also said Starbucks must deliver the best customer experience every day, especially during the morning rush hour. This includes improving staffing in its stores, simplifying baristas’ jobs and rearranging the mobile ordering system so it “does not overwhelm the cafe experience”. Niccol also wants to bring back the café experience, where Starbucks once again offers the same amenities as a local coffee shop.

Finally, Niccol said he wants to reintroduce Starbucks to the world, which would include fundamentally changing its marketing strategy. He said that instead of focusing primarily on Starbucks Rewards customers, the company should talk to all of its customers. He added that Starbucks will try to fix its overly complex menu and pricing structure.

No easy fix

Starbucks’ shares have risen sharply since Niccol’s appointment as CEO, a result of his reputation for helping turn around Chipotle. But the truth is that turning Starbucks around will likely be a much tougher task.

Meanwhile, some of the things Niccol hinted at to boost sales are likely to hurt profits in the near term. In his speech, he talked about improving the number of personnel and correcting the pricing architecture. Inadequate staffing was cited as a problem that would be detrimental to the company’s employees and customer experience. While the old management team seemed determined to solve this problem with technology alone, Niccol appears to have opened the door to hiring more workers. I think this will be a good move in the long run, but it will also increase expenses initially and eat into profits.

Niccol also briefly mentioned that pricing has been fixed. One theory as to why Starbucks was having trouble was that it started charging its occasional visitors. If the company is forced to reduce pricing, this will obviously hurt gross margins and profits. However, the company ran heavy promotions for Rewards Members during the quarter, but this did not increase traffic. Meanwhile, the company announced earlier this month that it would pause promotions to help reposition the company as a premium brand. So it will be interesting what Niccol does with pricing in this environment.

Niccol also talked about fixing Starbucks’ overly complicated menu. One of the beauties of the Chipotle model, where Niccol was previously CEO, was the company’s simple menu with few ingredients. However, Starbucks has long been known for serving customers who like to customize their drinks and order off-menu. This adds time to the process for baristas, but it’s also something that drives many people to the brand. Any major changes to the company’s menu could alienate many loyal customers, so it will have to walk a fine line on this issue.

One forward price-earnings (P/E) Starbucks, which has a ratio of around 22 according to 2025 analyst estimates, is still trading at a valuation below its value over the last few years.

SBUX PE Ratio (Forward 1y) data Y Charts

However, I think Niccol may have to take some painful steps to turn the brand around, which will push earnings to a lower level. Although it has improved the goodwill of investors, investors may not be ready for such actions.

While I think the stock should be a solid long-term option, given the recent rally and the fact that 2025 will likely be a very transitional year, I wouldn’t be a new money buyer of the stock right now.

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Geoffrey Seiler It 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 off Chipotle Mexican Grill. The Motley Fool has a feature disclosure policy.