Starbucks has the potential to effectively manage the challenges it has encountered recently, offering an opportunity to ‘meaningfully reaccelerate’ the business now that Brian Niccol has stepped in as the new chief executive, RBC Capital Markets stated. Niccol, who previously led the burrito chain Chipotle Mexican Grill, took over as CEO and chairman of Starbucks in September, succeeding Laxman Narasimhan.
In its report for the fiscal fourth quarter, Starbucks revealed a 7% decline in global comparable store sales, which surpassed the 6.5% drop anticipated by analysts from Capital IQ. Sales in North America and the U.S. fell by 6%, while the company experienced a significant 14% decrease in China. Niccol acknowledged to stakeholders, ‘It is clear we need to fundamentally change our strategy to win back customers.’ RBC initiated coverage of Starbucks stock with an outperform rating and a price target set at $115.
Analyst Logan Reich expressed confidence in Niccol's capacity to enhance store operations and elevate consumer brand perception. Some challenges faced by Starbucks are not unique to the company; Reich noted that it may take a quarter or two for the company's U.S. business to regain growth momentum. In fiscal 2024, Starbucks' GAAP operating margin fell by 130 basis points year-over-year to 15%, largely due to investments in partner wages and benefits, along with heightened promotional efforts.
RBC does not expect any year-over-year improvement in margins until the fourth quarter, yet they speculate that a more significant recovery could be on the horizon by 2026. The firm remains hopeful that an eventual recovery in China will facilitate a return to double-digit growth, fueled by rising urbanization and increasing coffee consumption.
‘We acknowledge the path forward will likely be volatile, but believe the bar is low,’ Reich communicated, also adding that a partnership in China could alleviate some adverse impacts on the business, which is seen as a promising development..