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Starbucks (SBUX +6%) remains caffeinated after posting improving metrics in Q1 (Dec) as its Back to Starbucks turnaround plan shows early benefits. The global retail coffee chain returned to posting earnings upside in Q1 despite delivering another quarter of declining revenue growth yr/yr. Global comps also continued to contract. However, the declines were noticeably improved from last quarter before CEO Brian Niccol, who took over in August, outlined the company's Back to Starbucks strategy, highlighting the early success of SBUX's comprehensive initiative to win back customers and return to growth following multiple periods of lackluster results.

• In Q1, SBUX posted an EPS of $0.69, a few pennies above consensus on $9.4 bln in revenue, a 0.3% dip yr/yr. Global comps contracted by -4%, driven by a 6% drop in comparable transactions partially offset by a 3% improvement in average ticket. North American, U.S. and International comps fell by the same rate as global comps. However, all numbers represented an uptick from last quarter, when global comps slipped by -7%, with North America and International comps compressing by -7% and -6%, respectively.
  • China, SBUX's second-largest market, was a clear gainer from last quarter, with comps down by just -6% compared to a -14% plunge in Q4 (Sep). Mr. Niccol noticed several near-term changes the company can implement to stabilize and strengthen its business in China.
• SBUX attributed the solid sequential improvements to its Back to Starbucks plan, which focuses on four pillars: reintroduce Starbucks, deliver an experience to win the morning, re-establish Starbucks as the community coffeehouse, and ensure a position at the company is unrivalled in retail. The first three components center on menu simplification, store renovation, and improved marketing campaigns, while the fourth pillar revolves around enhancing the workplace via precision scheduling, new routines, and simplified beverage builds.
• SBUX kicked off its turnaround plan by reducing the frequency of discount-driven offers, spurring a 40% decline in discounted transactions in Q1. The company also removed extra charges for non-dairy customizations. Meanwhile, SBUX conducted some late simplifications to its holiday lineup, targeting a roughly 30% reduction in beverages and food SKUs by the end of FY25 (Sep).
  • A few other enhancements SBUX has rolled out or is still working on include launching a pilot program across hundreds of stores to improve staff efficiency and updating the Starbucks app.
• SBUX's guidance remains suspended as it continues embarking on its turnaround program. However, management provided some commentary on the near term, noting that EPS is expected to be lowest in Q2 due to seasonality, an ongoing organization restructuring as SBUX brings on former Taco Bell executives and elevated investments. Nevertheless, SBUX anticipates EPS to improve during the back half of the year.

Back to Starbucks has started to bear fruit, as evidenced by the improving numbers in Q1 and SBUX's U.S. category share among quick service restaurants recovering following two quarters of decline. There is still plenty brewing at SBUX that can create volatility over the near term. However, we like Brian Niccol's plan and SBUX's capacity to continue to deliver improving results this year.