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Shares of coffee giant Starbucks (NASDAQ: SBUX) popped on Wednesday after the company reported financial results for its fiscal first quarter of 2025 -- the first quarter of its hopeful turnaround. Global transactions fell 6% but Starbucks stock was counterintuitively up 7% as of 12:30 p.m. ET. Here's why.
Starbucks' plan is said to be on track
As fiscal 2024 was wrapping up, the backwards momentum for Starbucks' business was certainly accelerating. Global same-store sales dropped 7% year over year in the fourth quarter, driven by an 8% drop in transactions. Therefore, while transactions still fell in Q1, the 6% drop was an improvement from Q4. And management says that trends improved throughout the quarter.
Starbucks' operating margin took a huge step back as well. In Q1, its operating margin was 11.9% compared with an operating margin of 15.8% in the prior-year period. The company is paying its workers more and dropping the extra charge for dairy substitutes. And a drop in profitability is always concerning.
That said, investors are overlooking these things because Starbucks says it's on track with its turnaround plan -- the plan that it paid new CEO Brian Niccol big money to come in and implement back in August.
But there's a lot more work to do
In spite of the steep drop in profitability, income investors can breathe easily because Starbucks' management announced its next dividend payment will be right on schedule and in line with the previous dividend payment.
Regarding the more pressing issue -- the timetable on the turnaround -- Starbucks says that its earnings per share (EPS) will be down by a greater amount in the upcoming second quarter as management works through restructuring charges, among other things. But thereafter, its EPS is expected show growth on a year-over-year basis.
The takeaway for investors is that Starbucks needs to get back to top-line and bottom-line growth -- it's not there yet. That's to be expected because plans take time. Therefore, I see reasons to neither get too optimistic or too pessimistic with Starbucks stock. Shareholders should remain patient with Niccol but there will need to be better progress with the turnaround plan before the year is done.
Should you invest $1,000 in Starbucks right now?
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