We're raising our price target on Starbucks after a robust beat-and-raise quarter

We're raising our price target on Starbucks after a robust beat-and-raise quarter

Shares of Starbucks rallied on Tuesday after the coffee giant topped Wall Street estimates and lifted its full-year outlook — a major signal that CEO Brian Niccol's turnaround plan is gaining momentum. Revenue in the three months ended March 29 totaled $9.53 billion, up 8.8% year over year and beating the consensus estimate of $9.16 billion, according to LSEG data. Adjusted earnings per share (EPS) came in at 50 cents, beating an expectation of 43 cents, LSEG data showed. On an annual basis, adjusted EPS grew 22%. Comparable store sales, a key restaurant industry metric, surged 6.2%, well ahead of the FactSet consensus of 4% growth. The stock jumped about 4% to roughly $102 per share in after-hours trading. SBUX 1Y mountain Starbucks 1-year return Bottom line The "turn" in the turnaround is here, according to Niccol, and it's hard to argue with that based on the second-quarter results. Niccol joined the company in September 2024, and while it took some time for him to find the right strategy for the stores and menus, we're starting to see him hit his stride. There are so many "first quarter since" superlatives in these numbers. This was Starbucks' first earnings beat in five quarters and only the second beat since the December 2023 result. It was the first quarter of growth on both the top and bottom line in more than two years. It was the first quarter of consolidated margin expansion since the first quarter of fiscal 2024. Starbucks posted positive comps across its top ten international markets, including China, for the first time in nine quarters. The key metric is comparable store sales — often called comps or same-store sales — to measure the performance of locations open for at least 13 months. It's the best measure of health for retail and restaurant companies. Starbucks crushed the estimates, with global comparable sales increasing 6.2%, driven by a 3.8% increase in comparable transactions and a 2.3% increase in average ticket. This beat the FactSet consensus estimate of 4%. In another good sign, management said the positive comp trends have continued through April, the first month of the current quarter. The outperformance was driven by Starbucks' most important market, the United States, where comp growth accelerated from 4% last quarter to a much better-than-expected 7.1%. That was driven by a 4.3% increase in comparable transactions and a 2.7% increase in average ticket. The increase in transactions shows more people are ordering Starbucks, but that's underselling it. Starbucks hasn't seen this level of transaction growth in three years. The popularity of its cold foam platform remained a big driver of success, with sales up 40%. Company-operated stores in the U.S. saw transaction growth across all "dayparts" — restaurants often divide the day into distinct sections, each with unique traffic and customer characteristics — and mornings are now back to fiscal 2022 levels. Even with these higher transaction volumes, customer service times have not slipped and remain on target. Next month, Starbucks is rolling out a new app feature that lets customers schedule their order pickup time. This should be great for customers and help further improve service times. The company redesigned its Rewards membership late in the quarter, and Niccol said it will become a "growth engine again," noting transaction growth from both rewards members and non-members. The number of 90-day active Starbucks Rewards memberships hit a record 35.6 million in the quarter, up slightly from the prior quarter's 35.5 million and 4% year over year. We're not going to tell you this was a major increase, but management was happy with the growth because they anticipated some drop off after updating the program. When you include results from Canada, which are reported in the broader North America segment, the same comp strength holds. North America's operating margins fell 170 basis points to 10.2%. Despite the gains typically seen from strong sales leverage, Starbucks is still annualizing investments related to its Green Apron service. In China, sales took a step back but still managed to squeak out a positive result. Comp sales missed the FactSet consensus of 3.5%, but still increased 0.5%, driven by a 2.1% increase in transactions and a 1.6% decline in average ticket price. China is a highly promotional market, explaining the ticket pressure. Looking ahead, China's role in the Starbucks turnaround story has become much more de-risked. The company formed a joint venture with Boyu Capital, a Chinese private equity firm, earlier this month, a move we liked because it allows management to focus on improving its U.S. operations while bringing in a partner with local expertise to pursue long-term opportunities. Looking at the broader international segment, comparable sales increased by 2.6%, driven by a 2.1% increase in transactions and a 0.5% increase in average ticket price. There was a sizeable year-over-year increase in operating income and margin, but don't get too excited: about half of the margin expansion was tied to accounting changes related to the joint venture. We're not surprised to see Starbucks' comp sales shine again. Niccol has launched a strategy to improve barista staffing levels, remodel stores to make them inviting again to grow sales, and close hundreds of underperforming stores. Unlike prior leadership, management has become much more careful about price increases. But the next big leg of the Starbucks story is about improving profitability. The company is targeting 13.5% to 15% operating margins in fiscal year 2028, and there's a lot more work to do to get them there from roughly 10% today. Niccol has been adamant that once he fixes top-line growth, earnings would follow; this quarter, he said, is proof that this strategy is working. The broader macro environment is not the cleanest for Starbucks due to high gasoline prices and other inflationary pressures, but it's hard not to be impressed by the operational fixes implemented here. After a beat-and-raise, the market should have more confidence in Niccol's strategy, resulting in a stock that can go higher. We're keeping our rating at 2 — meaning we'll wait for a pullback before buying more shares — but we're increasing our price target to $115 from $100. Outlook Following the better-than-expected quarterly results, management raised its outlook for fiscal year 2026. The company now expects global and U.S. comparable store sales growth of 5% or greater, up from its prior view of 3% or greater. Adjusted earnings per share are expected to be in the range of $2.25 to $2.45, which is above prior guidance of $2.15 to $2.40. The new $2.35 midpoint is above the FactSet consensus estimate of $2.29. The company continues to guide for adjusted operating margins to slightly improve year over year. Pressures from tariffs and coffee commodity prices are expected to moderate in the back half of fiscal 2026 (the next two quarters). (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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