Starbucks Q4 earnings: What to watch from the coffee giant

Coffee chain Starbucks (SBUX) will release its fiscal fourth quarter earnings results after Wednesday's market close. How is Starbucks CEO Brian Niccol's turnaround plan for the brand panning out so far?

Yahoo Finance executive editor Brian Sozzi is joined by senior reporters Brooke DiPalma and Ines Ferré and Innovator Capital Management chief investment strategist Tim Urbanowicz to further discuss the performance of the consumer discretionary (XLY) sector and Starbucks' new menu offerings and store traffic trends.

To watch more expert insights and analysis on the latest market action, check out more Opening Bid.

Video Transcript

00:00 Brian

Ahead of the report, I caught up with Starbucks CEO Brian Niccol on my Opening Bid Unfiltered podcast. Besides being curious on what new drinks he's cooking up next, I wanted to know where he thought the company was with its turnaround.

00:15 Brian Niccol

If I can get every single one of our coffee houses to be energized about the path we're on to becoming the world's greatest customer service company again, rooted in coffee, rooted in beverage, and rooted in this third place, you know, I'm really optimistic about where we can get to.

00:37 Brian

All right, so I I I dig Brian. I think he's going to drive a turnaround. Having said that, here are three areas I'm concerned about on Starbucks on this particular earnings day. One, the fast food industry had a challenging third quarter. It's unclear in such an environment if Starbucks was able to drive a bottom in its US sales. Two, company is investing a ton in its business from remodeling its stores to revamping its mobile app. I would be worried on how operating profit margins panned out. And three, Yahoo Finance data shows Starbucks shares trade at a premium to the broader market at 31 times forward earnings. I'm not 100% confident the numbers will show the turn in the business yet to warrant that outsized premium. Let's get the round table in here to discuss. Tim, coming back to you here, a little less excited on Starbucks versus Nvidia, of course, but what's your take on Starbucks right now?

01:33 Tim

Well, Brian, I thought you'd be more excited with the protein coffee that they they they rolled out here. We'll see how that.

01:42 Brian

I have no more room for a Starbucks tattoo, Tim. I got Jensen and Wang on my arms, okay?

01:48 Tim

That's great. Well, Brian, we we've been seeing mixed messages from the discretionary sector as a whole. If you look at this reporting season, uh about 29% of companies that have reported thus far have missed their their estimates. That's leading any sector in the S&P 500. So a lot of question marks at the the macro level. Brooke talked about the the K-shaped economy that that we have here with those lower and middle tier consumers struggling. Yes, Starbucks does cater to the the upper tier of that, but still pulling in a lot of that middle, which we it's it's really hard to tell where those consumers are at. We think that they're they're struggling as prices have gone up, tariffs have hit them pretty hard. You know, their their real incomes have been reduced. And so we do think that poses a challenge uh to companies like uh like Starbucks and I I think our sentiment matches uh that what you're you laid out there, Brian.

02:35 Brooke

Brian, I like Starbucks and the new protein coffee. Digging it, a little pricey for me. Tastes good, tastes a little bit of like a whey protein shake, dig it. I like what Brian's doing with the uh food menu. You're going to hear probably a lot more things from them over the next 12 months to improve that bakery case that's really been lagging for the past four or five years. But look, I mean this this is not probably going to be a perfect quarter. They have a lot going on.

03:00 Brooke

Right, and they have so much going on. Uh keep in mind that that Brian Niccol has only been at the helm for about a year now. And he's announced so many changes, but it doesn't seem to be moving the needle with consumers just yet. It seems to be getting a lot of buzz on social media. The condiments are back, the, you know, the protein's in. But what we heard from Placer.ai, their foot traffic analytics company, is that over the past few months, foot traffic at Starbucks was still down. So, if you take a look at this, it fell as much as 6% uh for same store visits in the month of September, according once again to Placer.ai. And then that really stood out to me because September is really a key month for Starbucks. They bring back that pumpkin spice latte during the time and all the other innovations that now have come with it like the pumpkin cold brew and so on. And so that's really known to move the needle for Starbucks. It's really known to be some of the best selling days that this company has. And based upon this initial foot traffic, uh, you know, results that we got, it doesn't seem to be quite there just yet.

04:02 Brian

Ines, you're down with this uh Starbucks protein product line?

04:06 Ines

Look, I think it's uh great. I mean, I haven't tried it. uh because

04:12 Brian

Got to try it Ines. Got to try it. It's so good.

04:15 Ines

I I have to try it. I know. But you know, it's it's look they've got a lot of uh headwinds that they've been facing. Um I think that they the revamping the stores is going to probably be a plus. Um but there is only so much more that you can raise uh uh the price of a cup of coffee. I mean that's the for consumers, shelling out 5, 6, $7 each time that they're going to just take a drink. It's it's got to be it has to be very good and uh and and the headwinds that the company's facing are the increased labor costs, increased costs all around for all the inputs, etc. So, uh there it's a tight rope that they're walking on.

04:54 Brian

Tim, apologies again. You really got roped into a true madness of an episode here on opening bid. I mean there's a lot going on. We're all very excited. I mean, what's your favorite pick in consumer? If you don't dig Starbucks, is there another place you're leaning?

05:07 Tim

Well, I think we want to lean two places, Brian. One, we want to we want to cater towards that that higher end consumer. We think that that consumer is really skewing a lot of the macro data that we're seeing because they continue to spend. Their wealth has been going up with stock prices increasing as high as they have, rates have been higher, so their savings is earning more, which is all very good, but it doesn't tell the full story of what, you know, the the lower end consumer is feeling. And that's why, you know, we think the Fed is in a pretty tricky spot right now um with uh you know, with with to cut or not to cut. Um but yeah, we want to focus on those upper end consumers. We think companies like Costco uh that do cater there are going to continue to uh do well while companies that are catering in the middle, I think of something like Target, are going to continue to to struggle. So, and then on the lower end as well, Brian, we do think, you know, there's not really other places that uh these lower end consumers can go. They can't really pull back on spending because they're buying the essentials there. Um so we would put Walmart in a category where we continue to to like a name like that as well.

View Comments