Starbucks reported fiscal second-quarter results that fell short of expectations, reflecting ongoing challenges in its core markets. Net income attributable to the company declined sharply to $384.2 million, or 34 cents per share, from $772.4 million, or 68 cents per share, a year earlier. The company’s operating margin contracted to 6.9% from 12.8%, primarily due to increased labor costs associated with staffing more baristas in U.S. stores as part of its turnaround strategy. While net sales grew modestly by 2% to $8.76 billion, global same-store sales declined for the fifth consecutive quarter, falling 1% as transaction volumes slipped by 2%. The decline was driven largely by softer demand in the U.S. and China, where consumers are increasingly opting for more affordable coffee alternatives. Despite the weak performance, Starbucks noted that its strategic initiatives are beginning to yield early signs of progress.
Note: Starbucks FY'24 ended on September 29, 2024. Q2'25 refers to the quarter that ended on March 30, 2025.
Starbucks management chose not to issue the fiscal year 2025 guidance, indicating a period of recalibration under the new leadership. The current management emphasizes strategic reassessment and sustaining long-term growth through improved customer engagement and operational efficiencies. In late February 2025, Starbucks announced it would cut 1,100 corporate positions, plus several hundred unfilled roles, as part of the turnaround plan.
Former Chipotle CEO Brian Niccol took over as Starbucks' new CEO in September 2024 and has highlighted four main areas for improvement in his turnaround plan. His initial plan is to concentrate on its U.S. business. The focus is on providing the baristas with the tools they need to consistently make great drinks in a personal way. Next, he mentioned delivering high-quality food and drinks on time, every time. Third, he wants Starbucks to go back to being a community coffee house by elevating the customer experience. And finally, he wants Starbucks to go back to telling its story. The company owns its coffee farm in Costa Rica, which serves as its base for research and innovation in coffee. However, Niccol noted that the company rarely discusses it.
Starbucks is the world's leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products like high-quality whole bean coffees, freshly brewed coffees, Italian-style espresso beverages, cold blended beverages, food items like sandwiches, premium teas, and coffee-making equipment.
Starbucks' stores are located near offices and residential areas. They are larger, compared to its licensed stores which are much smaller and mostly located at airports and supermarkets.
Starbucks also sells its packaged coffee and tea through retail channels such as grocery stores, warehouse clubs, convenience stores, and US food service accounts.
The Company-Operated Stores division is more valuable than the Franchise Stores division for Starbucks for the following two reasons:
Starbucks makes money through its company-owned stores as well as through franchise fees and royalties from franchised stores. Starbucks earns higher profit margins from franchised stores compared to company-owned stores because there are no operational and employee costs involved with franchised stores, hence Starbucks gets to keep the entire royalty & rent fee without paying for any costs.
Revenues earned from Starbucks' company-owned stores are much higher than the franchised stores. This is because, although there are costs involved, Starbucks owns 100% of the revenues from its restaurants, while it gets a percentage of the revenues (in the form of royalty fees) from its franchised restaurants.
Food & beverage companies, in general, increase their reach and profits by having a large base of franchised stores. For example, McDonald's has 95% of its stores franchised, making the franchise business more valuable to its stock. However, Starbucks has almost an equal number of company-owned stores and franchised stores. In FY 24, Starbucks had 40,199 stores: 52% company-operated and 48% licensed.
China remains a long-term growth driver for the company, as its GDP, is projected to grow from around $18 trillion in 2024 to nearly $28 trillion by 2027 - likely driven by a massive increase in its middle class. Moreover, the per capita coffee consumption in China is about one-half of one cup per person per year compared to approximately 300 cups per person per year in the U.S. While consumption levels in China may never be able to match those in the U.S., even attaining a small fraction of it will benefit the company immensely.
Most new restaurants the company plans to open are in China/Asia Pacific. The number of Starbucks outlets in these countries is still much less than the number in the U.S. New outlets opened will be a mix of company-operated and franchised restaurants.
SBUX intends to open a majority of its new U.S. restaurants in middle America and the South, with over 80% of stores built in the year being drive-thrus. The company states that its research has indicated significant opportunities for store expansion in higher-growth, and lower-cost markets, particularly when considering rising wages and occupancy costs.
