Starbucks Corporation (NASDAQ: SBUX)

Starbucks' Q2 FY25 results reveal a company in transition implementing its "Back to Starbucks" strategy. While revenue grew modestly at 2.3%, comparable store sales performance was mixed across regions. The North America segment continued to face challenges with a 1% comparable sales decline, driven by a 4% drop in transactions partially offset by a 3% increase in average ticket. The U.S. specifically saw a 2% decline in comparable sales.

In contrast, the International segment showed signs of recovery with a 2% increase in comparable sales, driven by a 3% increase in transactions. This represents a significant improvement from the 6% decline in the prior year period. China's performance was particularly encouraging, with flat comparable sales compared to an 11% decline in Q2 FY24, reflecting a 4% increase in transactions offset by a 4% decline in average ticket.

Despite the modest revenue growth, profitability declined substantially year-over-year. GAAP operating margin contracted 590 basis points to 6.9%, while non-GAAP operating margin (excluding restructuring costs) contracted 460 basis points to 8.2%. These margin contractions were primarily driven by:

• Additional labor investments to support the "Back to Starbucks" strategy
• Deleverage from negative comparable store sales in North America
• Restructuring costs of $116.2 million related to simplifying the global support organization
• Increased store operating expenses, which rose 12.1% year-over-year

The North America segment, which accounts for approximately 74% of total revenue, saw revenue increase 1% to $6.5 billion in Q2 FY25. This growth was primarily driven by net new company-operated store growth of 5% over the past 12 months, partially offset by a 1% decline in comparable store sales and a decline in the licensed store business.

Comparable store sales were driven by a 4% decline in transactions, partially offset by a 3% increase in average ticket. In the U.S. specifically, comparable store sales declined 2%, with a 4% decline in transactions partially offset by a 3% increase in average ticket.

Operating income decreased significantly to $748.3 million from $1.1 billion in Q2 FY24, a decline of 35%. Operating margin contracted 640 basis points to 11.6%, primarily driven by deleverage from negative comparable sales and additional labor investments to support the "Back to Starbucks" strategy.

The International segment saw revenue increase 6% to $1.9 billion in Q2 FY25. This growth was primarily driven by:

• 8% net new company-operated store growth over the past 12 months
• An increase in the licensed store business
• Incremental revenue from the acquisition of a U.K. licensed business partner
• 2% increase in comparable store sales, driven by a 3% increase in transactions partially offset by a 1% decline in average ticket

These increases were partially offset by an approximate 2% unfavorable impact from foreign currency translation.

Operating income decreased to $217.0 million from $233.8 million in Q2 FY24, a decline of 7%. Operating margin contracted 170 basis points to 11.6%, primarily driven by increased promotional activity and restructuring costs related to simplifying the global support organization, partially offset by leverage from positive comparable sales growth.

China, which is reported as part of the International segment, showed significant improvement with flat comparable store sales in Q2 FY25, compared to a decline of 11% in Q2 FY24. This stabilization was driven by a 4% increase in transactions, offset by a 4% decrease in average ticket.

Net revenues in China increased 5% to $739.7 million, primarily driven by 9% store growth year-over-year. The total store count in China reached 7,758 at the end of Q2 FY25.

The stabilization of China's performance is an encouraging sign for Starbucks, as it represents a key growth market for the company. The improvement in transaction counts suggests that the company's efforts to drive customer engagement in China may be gaining traction.

The Channel Development segment, which includes packaged coffee, ready-to-drink beverages, and foodservice accounts, saw revenue decline 2% to $409.0 million in Q2 FY25. This decrease was primarily due to a decline in revenue in the Global Coffee Alliance, partially offset by an increase in global ready-to-drink revenue.

Operating income decreased to $193.5 million from $216.3 million in Q2 FY24, a decline of 11%. Operating margin contracted 440 basis points to 47.3%, primarily driven by higher product costs related to the Global Coffee Alliance and a decline in North American Coffee Partnership joint venture income. This contraction was partially offset by favorable mix shift.

In early 2025, under the leadership of new CEO Brian Niccol (who joined from Chipotle), Starbucks launched its "Back to Starbucks" strategy aimed at revitalizing the brand and improving performance. While the company has not disclosed all details of this strategy, key elements based on management commentary include:

• Store Partner (Employee) Focus: Increasing labor investments to improve store operations and customer experience. This includes better training, enhanced staffing levels, and improved operational systems.
• Coffee-Forward Approach: Renewed emphasis on coffee quality and expertise as the core of the Starbucks brand identity.
• Simplified Operations: Streamlining menu offerings and store procedures to improve speed of service and operational efficiency.
• Organizational Restructuring: In February 2025, the company announced the reduction of 1,100 support partner roles and several hundred additional open positions within its global support organization to create a more efficient corporate structure.
• Improved Value Proposition: Balancing premium positioning with value offerings to address increased consumer price sensitivity.
• Enhanced Digital Experience: Continued investment in the Starbucks Rewards program and mobile ordering capabilities to drive customer engagement and loyalty.

The Q2 FY25 results represent an early stage in this turnaround strategy, with significant investments impacting near-term profitability. CEO Brian Niccol expressed increased confidence in the strategy, noting "improving transaction comp in a tough consumer environment" as evidence that the plan is beginning to show results.

At the end of Q2 FY25, Starbucks maintained a solid financial position despite facing operational challenges and making significant investments in its turnaround strategy. Cash and cash equivalents stood at $2.7 billion, down from $3.3 billion at the end of fiscal 2024, primarily due to capital expenditures and dividend payments.

Key balance sheet and cash flow metrics for the first half of fiscal 2025 include:

• Operating Cash Flow: Starbucks generated $2.4 billion in operating cash flow for the first half of fiscal 2025, down 18.2% from $2.9 billion in the same period of fiscal 2024. This decline reflects lower earnings and changes in working capital.
• Capital Expenditures: The company invested $1.3 billion in capital expenditures during the first half of fiscal 2025, slightly up from $1.26 billion in the prior year period, reflecting ongoing investments in new store openings and existing store renovations.
• Debt Position: Total debt was $15.6 billion at the end of Q2 FY25, consisting of $2.2 billion in current portion of long-term debt and $13.3 billion in long-term debt. The company's debt level remained relatively stable compared to the end of fiscal 2024.
• Dividend: The Board declared a cash dividend of $0.61 per share, payable on May 30, 2025, to shareholders of record on May 16, 2025. This represents a 7% increase from the prior year's quarterly dividend of $0.57 per share. For the first half of fiscal 2025, Starbucks paid $1.4 billion in dividends, up 7.1% from $1.3 billion in the same period of fiscal 2024.
• Share Repurchases: Unlike the prior year period when the company repurchased $1.3 billion of common stock, Starbucks did not repurchase any shares during the first half of fiscal 2025, likely reflecting a strategic decision to preserve capital during the implementation of the "Back to Starbucks" turnaround plan.

The company has maintained its 60 consecutive quarters of dividend payouts with a compound annual growth rate (CAGR) of nearly 19% over that time period, demonstrating its commitment to returning value to shareholders despite near-term operational challenges.

Starbucks continues to expand its global store footprint as a key growth driver, opening 213 net new stores in Q2 FY25, bringing its total to 40,789 stores worldwide. The company maintains a balanced ownership approach with 53% company-operated and 47% licensed stores.

The U.S. and China markets remain the core of Starbucks' global business, together comprising 61% of the company's global portfolio. As of Q2 FY25, the U.S. had 17,122 stores (up 3% year-over-year) and China had 7,758 stores (up 9% year-over-year).

For the first half of fiscal 2025, Starbucks opened 590 net new stores globally, a slower pace compared to 913 net new stores in the first half of fiscal 2024. This moderation in new store growth may reflect a more disciplined approach to expansion as the company focuses on improving performance at existing locations.

By segment, store growth for the first half of FY25 included:

• North America: 203 net new stores (170 company-operated and 33 licensed)
• International: 387 net new stores (317 company-operated and 70 licensed)

The lower rate of licensed store openings in the International segment (70 in H1 FY25 vs. 340 in H1 FY24) is particularly notable and may reflect a more selective approach to international expansion or challenges with finding suitable licensing partners in some markets.