Starbucks’s SWOT analysis: coffee giant’s stock faces turnaround challenges

Starbucks Corporation (NASDAQ:SBUX), the world’s leading specialty coffee retailer with a market capitalization of $106.1 billion, is navigating a complex landscape of challenges and opportunities as it implements a comprehensive turnaround strategy. With a global presence spanning North America, Latin America, Europe, the Middle East, and the Pacific Rim, this prominent player in the Hotels, Restaurants & Leisure industry finds itself at a critical juncture, balancing the need for operational improvements against macroeconomic headwinds and evolving consumer preferences.

Recent Performance and Financial Results

Starbucks reported mixed results in its most recent quarterly earnings. For the first quarter of fiscal year 2025, the company posted earnings per share (EPS) of $0.69, slightly surpassing the consensus estimate of $0.67. This performance was driven primarily by better-than-expected comparable sales, particularly in the United States and China markets.

In the U.S., comparable sales improved by 200 basis points quarter-over-quarter, with transaction growth being a key contributor. Meanwhile, China saw an impressive 800 basis point acceleration in comparable sales, signaling a potential recovery in this crucial international market.

Despite these positive indicators, Starbucks faces ongoing challenges. The company’s global comparable store sales growth (SSSG) for Q1 FY25 was reported at -4.0%, reflecting the broader difficulties in the retail sector. With 22 analysts recently revising their earnings estimates downward according to InvestingPro, and the stock currently trading at a high earnings multiple of 40.25x, the pressure on profitability is evident in the adjusted EBITDA margin decrease to 16.3% from 19.7% in the previous year.

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Turnaround Strategy and Initiatives

Under the leadership of CEO Brian Niccol, Starbucks has embarked on a comprehensive turnaround plan dubbed "Back to SBUX." This strategy focuses on enhancing the customer experience, improving operational efficiency, and reinvigorating the brand’s core values.

Key initiatives include:

1. The "Green Apron Initiative": A pilot program aimed at reducing café wait times and improving service efficiency. This model is set to be deployed in over 2,000 U.S. company stores by May and eventually across all company-operated locations.

2. SKU reduction: Starbucks plans to eliminate approximately 30% of its beverage and food SKUs by the end of FY25, streamlining operations and potentially improving margins.

3. Digital menu boards and Mobile Order app updates: These technological enhancements are designed to improve the ordering process and overall customer experience.

4. Labor investments: The company is shifting its focus towards labor investments over equipment to improve operations, which may impact store-level profit and loss in the short term but is expected to yield long-term benefits.

5. Management restructuring: Starbucks has made significant changes to its executive team, including the appointment of Cathy Smith as the new EVP & CFO, effective April 2025.

Market Challenges and Opportunities

Starbucks operates in a dynamic and competitive market environment, facing both challenges and opportunities:

Challenges:

• Macroeconomic uncertainties, including potential tariff impacts and consumer spending fluctuations
• Rising costs, particularly in green coffee prices and labor expenses
• Operational inefficiencies that have led to longer wait times and inconsistent service

Opportunities:

• Continued growth in the specialty coffee market, which outpaces overall foodservice growth
• Expansion potential in international markets, particularly in China
• Innovation in product offerings and customer experience enhancements
• Leveraging the company’s strong brand equity in consumer packaged goods

Regional Performance

United States:

The U.S. market, which contributes approximately 80% of Starbucks’ EBITDA, has shown signs of improvement. Recent data indicates an increasing percentage of U.S. stores experiencing transaction growth and positive comparable sales. However, challenges remain, with some analysts projecting a -3% expectation in comparable sales for the third quarter of fiscal year 2025.

International:

China, Starbucks’ second-largest market, has demonstrated encouraging recovery trends. The significant acceleration in comparable sales growth suggests that the company’s international strategies may be gaining traction. However, geopolitical tensions and economic uncertainties continue to pose risks to international expansion efforts.

Bear Case

Can Starbucks overcome its operational challenges in the near term?

Starbucks faces significant operational hurdles that may impede its short-term recovery. The company’s "Back to SBUX" initiative, while promising, requires substantial investments in labor and technology. These investments are expected to pressure margins and earnings in the near term, potentially leading to lower-than-expected financial performance.

Analysts project that the turnaround timeline may be longer than initially anticipated, with no significant comparable sales benefit expected until fiscal year 2026. This extended recovery period could test investor patience, especially in a slowing macroeconomic environment. Moreover, the complexity of implementing new service models and product innovations across thousands of stores globally presents execution risks that could delay the realization of operational improvements.

How will rising costs impact Starbucks’ profitability?

Starbucks is grappling with increasing cost pressures on multiple fronts. Rising green coffee prices pose a significant threat to the company’s profitability, particularly in its channel development segment. Labor costs are also on the rise as the company invests in its workforce to improve service quality and efficiency.

These cost increases, coupled with potential tariff-related inflation, are likely to squeeze margins in the coming quarters. Analysts have revised their earnings estimates downward, with some projecting fiscal year 2025 EPS as low as $2.05, down from previous estimates of $2.70. The company’s ability to pass on these higher costs to consumers through pricing actions may be limited in a competitive market environment, potentially leading to sustained margin pressure and slower earnings growth.

Bull Case

Will Starbucks’ turnaround strategy lead to sustainable growth?

Proponents of Starbucks’ turnaround plan argue that the company’s strategic initiatives are addressing core operational issues and setting the stage for long-term success. The "Green Apron Initiative" has shown promising early results in reducing wait times and improving service efficiency. These operational improvements, combined with SKU reduction and digital enhancements, could lead to a more streamlined and profitable business model.

Analysts supporting this view believe that as these initiatives gain traction, Starbucks could see significant earnings power with operating margins potentially reaching 15-16% by fiscal year 2028. The company’s strong brand loyalty and growing rewards program membership provide a solid foundation for recovery. If Starbucks can successfully execute its turnaround plan, it may emerge as a more efficient and customer-focused organization, well-positioned for sustainable growth in the specialty coffee market.

Can Starbucks capitalize on international market opportunities?

Starbucks’ international expansion, particularly in China, represents a significant growth opportunity. The company’s recent performance in China, with an 800 basis point acceleration in comparable sales, suggests that its international strategies are gaining momentum. Starbucks’ brand strength and premium positioning in international markets could allow it to capture a growing share of the global coffee consumption trend.

Moreover, the company’s potential to double its U.S. store count through smaller format stores indicates substantial room for growth even in mature markets. If Starbucks can successfully navigate geopolitical challenges and adapt its offerings to local preferences, international markets could become a major driver of long-term revenue and profit growth. The company’s ability to leverage its global scale while maintaining local relevance will be crucial in capitalizing on these international opportunities.

SWOT Analysis

Strengths:

• Strong global brand recognition and customer loyalty
• Extensive global presence with over 29,000 locations
• Robust rewards program and digital engagement platform
• Premium positioning in the specialty coffee market
• Diversified revenue streams including retail and consumer packaged goods

Weaknesses:

• Operational inefficiencies leading to inconsistent customer experiences
• Margin pressures from rising costs and investments in turnaround initiatives
• Dependence on the U.S. market for a significant portion of revenue and profits
• Vulnerability to fluctuations in coffee prices and other commodity costs

Opportunities:

• Expansion potential in international markets, particularly in China
• Innovation in product offerings and customer experience enhancements
• Growth in the specialty coffee market outpacing overall foodservice growth
• Leveraging technology for improved operational efficiency and customer engagement
• Potential for licensing and partnerships to expand brand reach

Threats:

• Intense competition in the coffee retail and consumer packaged goods sectors
• Economic uncertainties and potential impact on consumer spending
• Geopolitical risks affecting international operations
• Changing consumer preferences and health trends
• Regulatory challenges related to labor practices and environmental sustainability

Analysts Targets

• Baird Equity Research (August 12, 2025): Outperform, $115
• Jefferies (July 17, 2025): Underperform, $76
• Barclays (May 16, 2025): Overweight, $98
• BMO Capital Markets (April 30, 2025): Outperform, $100
• Goldman Sachs (April 30, 2025): Neutral, $85
• Jefferies (April 9, 2025): Hold, $76
• Baird Equity Research (April 7, 2025): Neutral, $85
• Barclays (March 5, 2025): Overweight, $124
• RBC Capital Markets (January 29, 2025): Outperform, $115
• BMO Capital Markets (January 29, 2025): Outperform, $115
• BofA Global Research (January 29, 2025): Buy, not specified
• Barclays (January 29, 2025): Overweight, $124

Starbucks Corporation faces a critical period as it implements its turnaround strategy amidst challenging market conditions. While the company’s strong brand and global presence provide a solid foundation, highlighted by its 15-year streak of dividend increases and maintained payments for 16 consecutive years, the success of its operational improvements and ability to navigate cost pressures will be crucial in determining its future performance. Currently operating with annual revenue of $36.7 billion and a moderate level of debt, investors and analysts remain divided on the stock’s prospects, with price targets ranging from $76 to $124, reflecting the uncertainty surrounding the pace and effectiveness of Starbucks’ recovery efforts. According to InvestingPro’s Fair Value analysis, the stock appears to be trading above its intrinsic value, suggesting careful consideration before investment.

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This analysis is based on information available up to August 14, 2025, and market conditions may have changed since then.

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