Starbucks missed analyst estimates for revenue and EPS in the fiscal 2025 second quarter.
CEO Brian Niccol believes that investing more in labor and less on equipment is the right move to improve the customer experience.
Investors should incorporate the current valuation into their decision-making process.
Starbucks(NASDAQ: SBUX) is in the midst of a major turnaround. As part of CEO Brian Niccol's "Back to Starbucks" plan, the leading coffeehouse chain is trying to win back customers and get on stronger financial footing. However, it will surely be a tough road ahead.
It's been extremely difficult for Starbucks investors. As of this writing, the restaurant stock has produced a total return of just 23% in the past five years. This pales in comparison to the 104% total return of the S&P 500 Index.
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Should investors buy Starbucks shares with $1,000 right now and hold until 2030?
Another challenging quarter
During the 13-week period that ended March 30, corresponding to the second quarter of 2025, Starbucks raked in $8.8 billion in revenue, which was 2.3% higher than the same period a year ago. While the positive gain is nice to see, that top-line figure missed Wall Street expectations.
Continuing a disappointing streak, Starbucks reported another same-store sales decline, this time of 1%. This marked the fifth straight year-over-year drop. The company's most important market, the U.S., saw a 4% dip in transactions. While China, another important geography, registered a 4% increase in transactions, it was offset by a 4% fall in the average ticket size.
The bottom line took a hit, with earnings per share falling 50% in Q2. It's worth highlighting that a major factor here is Starbucks spending more on labor.
"We're finding through our work that investments in labor rather than equipment are more effective at improving throughput and driving transaction growth," Niccol said on the earnings call.
It makes sense that Starbucks is investing in what is arguably its most important asset, its workforce, to improve the experience for customers. There is one potential issue that I see, though. Maybe higher labor costs will be persistent, and Starbucks never gets back to a consistent, mid-teens operating margin again. It's something investors need to pay attention to going forward, especially with less of an emphasis on making progress with automation.
Building on Starbucks' strength
While Starbucks' financial challenges certainly provide enough of a reason to be pessimistic, it's not all bad news. Prospective investors and existing shareholders can hang their hat on the company's durable competitive advantage that stems from its brand presence. This has stood the test of time.
Niccol and his management team understand that the Starbucks name is exceptionally valuable. And they want to build on this competitive positioning to get things back on track. A new marketing campaign in the U.S. is resonating with consumers.
There are other positive trends working in Starbucks' favor. In stores that started utilizing a new sequencing algorithm, 75% of orders were served to customers in less than four minutes. As it relates to the menu, after Starbucks took customer suggestions and removed sugar from its matcha powder, sales of the beverage shot up 40% year over year. These are encouraging developments of decisions that are working.
Patience is key
It's not surprising that Niccol and his team remain optimistic about the direction Starbucks is headed. After all, one of the most important parts of any CEO's job is to instill confidence among the investment community.
But I think in this instance, being critical is the right mentality. Investors looking at buying $1,000 of Starbucks stock should instead practice patience. Wait until there are concrete financial improvements before even considering adding the business to your portfolio. In particular, same-store sales need to turn positive, and the operating margin needs to expand.
It also doesn't help that the price-to-earnings ratio is currently 25.8. In my opinion, this is a steep valuation to pay for a company that's in the middle of a challenging turnaround.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
