Starbucks (SBUX +0.98%) brought in former Chipotle CEO Brian Niccol to turn around the struggling coffee chain, and nearly two years later, his effort seems to be bearing fruit.
Comparable sales are surging after Niccol’s initiative appears to be paying off, and profit margins are expanding as well. Now, Starbucks appears to be taking the next step on its turnaround journey, announcing that it will lay off 300 corporate employees in the U.S., in its third round of job cuts since Niccol took over.
Image source: Starbucks.
Starbucks’ latest cost-cutting moves
Management said in an SEC filing that as part of its “Back to Starbucks” strategy, Niccol’s name for the turnaround plan, it is streamlining its domestic and international support organization and non-retail facilities, as well as reducing the operational complexity of Starbucks Reserve and Roastery locations. That includes layoffs and the closure of regional office locations in Dallas, Chicago, and Atlanta.
As a result of those moves, Starbucks is taking $400 million in restructuring, which includes $280 million for asset impairment for office space and scaling back operations at some Reserve and Roastery locations, as well as $120 million related to the layoffs.
Starbucks said the move was part of its goal of cutting $2 billion in expenses, and it’s aiming for 90% of its international cafes to be licensed.
It’s unclear how much money the company intends to save, though the restructuring costs are substantial.
Today’s Change
(0.98%) $1.03
Current Price
$106.81
Key Data Points
Market Cap
$121B
Day’s Range
$105.00 – $107.88
52wk Range
$77.99 – $108.88
Volume
6.5M
Avg Vol
7.7M
Gross Margin
15.85%
Dividend Yield
2.31%
How the turnaround is going
After profits initially fell under Niccol due to investment in store operations like increased staff, the latest report showed the “Back to Starbucks” plan beginning to deliver results. In the fiscal second quarter, the company reported comparable store sales growth of 7.1% in North America, and 6.2% globally, with both transactions and average ticket up in both markets. Even China returned to modest growth with comps up 0.5% in the period.
Adjusted operating margin rose 120 basis points to 9.4%, and adjusted earnings per share were up 22% to $0.50. Niccol commented on the speed of service across the business, as well as menu innovation, and a more efficient corporate team.
Among the core components of the “Back to Starbucks” plan is restoring a human touch to its service and brand, including the idea of it being a “third place” as Howard Schultz envisioned the business. The company added staffing to locations to improve service and reduced menu options to improve the speed of service, making the job easier for baristas as well.
The momentum from those efforts led the company to raise its full-year adjusted earnings per share to $2.25-$2.45 and comparable store sales of at least 5%. The company’s EPS peaked in fiscal 2023 at $3.58, so there should be room for earnings to go significantly higher.
Is Starbucks a buy?
Starbucks stock jumped when Niccol was named as the new CEO, given his success at Chipotle, and high expectations are still baked into the stock as it now trades at a forward P/E of 46, which implies significant growth.
Still, shares jumped after its latest earnings report, and there’s a lot of room for margins to expand if comps keep moving higher. While the stock is pricey, taking a small position at this point seems reasonable given that there is still plenty of upside if the turnaround is successful.
