By Evie Liu

Starbucks' stock has dropped 28% from a recent high on Feb. 28, as recession fears take a toll on the coffee chain that is already battling declining sales.

Starbucks' earnings, set for release on Tuesday after the market closes, will offer the latest look at how the turnaround moves by CEO Brian Niccol are paying off.

Wall Street isn't expecting much improvement for now: For the second fiscal quarter ended in March, analysts polled by FactSet expect Starbucks to post 49 cents in earnings per share, down 28% from a year ago. While analysts anticipate the coffee chain's revenue to grow 3% to $8.8 billion, much of that is driven by new store openings. Same-store sales for existing locations are expected to shrink 1% from the year-ago quarter, according to estimates.

Starbucks was a Barron's stock pick last June, even as sales were slowing and consumers dialed back their spending. We argued that Starbucks is still a respected brand and management was actively fixing its problems.

Our call was prescient: just a couple of months later, Starbucks poached Niccol, the former CEO of Chipotle Mexican Grill who transformed the firm in a few short years, to turn the coffee giant around. Starbucks shares gained 57% from last August, when Niccol was appointed, through the end of February.

Niccol has made various moves to speed up Starbucks' service and revive its warm vibe. And there are already some results. In March, foot traffic at the coffee chain's U.S. locations was down 2% from a year ago, an improvement from February, when traffic was down more than 4%, according to Placer.ai, which tracks retail and restaurant visits across the country.

Starbucks declined to make Niccol available for an interview, citing the quiet period before its earnings report.

The CEO wants to cut wait times to less than four minutes, adding more employees in stores, installing more efficient workstations, and testing a new algorithm to improve order sequencing and allow mobile customers to set their own pickup time.

Starbucks' extensive menu -- with dozens of drinks and endless customizations of milk, syrups, and sweeteners -- also slows down service. Niccol plans to eliminate 30% of the menu items to focus on the firm's core coffee offerings, while condiment bars have been brought back so customers can help themselves.

But like many CEOs, Niccol is facing challenges that are out of his control. President Donald Trump's whiplash on tariffs has heightened uncertainty in the markets, triggering recession fears. Consumer sentiment has dropped to its second lowest level since 1952, while sales at restaurants and bars are falling.

"The challenge for Starbucks is that you really can't define gravity," says Morningstar analyst Sean Dunlop, "This is a very discretionary product. People typically trade away from it toward the grocery store."

To drive more purchases, Starbucks has removed the extra charge for nondairy milk and expanded free refills to include non-rewards members.

Meanwhile, the cost of Arabica coffee beans have been soaring as drought and frost in Brazil slashed supply. Starbucks typically locks in supply with future contracts. Still, management expects pricier coffee beans to shave its second-quarter earnings by one cent. Starbucks said it won't increase prices at its North American stores through fiscal year 2025.

A smaller, coffee-centric menu could limit Starbucks' reach to consumers, who are increasingly attracted by various new beverage options beyond coffee. "I can buy a pack of Celsius on Amazon, put it in my fridge, and drink it on my way out instead of waiting in line at Starbucks," Stephens analyst Jim Salerahe says. "There has to be something unique about going to the store and having it made fresh."

Starbucks said it remains a leader in beverage innovation, pointing to the successful recent launch of its Dubai Chocolate Matcha Latte.

To Niccol, part of Starbucks' magic is the vibe of a community gathering space. Many Starbucks stores have drifted away from that as mobile and drive-through orders become more common. In the past five years, small coffee chains have experienced a growing share of visits longer than 10 minutes, according to Placer.ai, while midsize and large chains have seen a shift toward shorter pickup visits.

To bring people back to its cafes, Niccol has asked baristas to hand write notes on cups and serve drinks in ceramic mugs. Starbucks is also remodeling some stores to make them more welcoming, often by adding more comfortable seating.

It remains to be seen whether that would lure consumers back. Dutch Bros, a coffee chain from Oregon, has seen strong growth in recent years even though it has no indoor seating at all.

"I just think, how many people really want to sit around in a Starbucks cafe these days?" says Jefferies analyst Andy Barish.

Capital spending to improve efficiency and the store renovations could pressure profit. Wall Street analysts polled by FactSet expect Starbucks earnings to contract 12% in fiscal 2025, which ends in September, before recovering in 2026.

"This is a turnaround that's going to take some time, and the slope of the recovery is not going to be as steep as people think," says Barish.

Write to Evie Liu at evie.liu@barrons.com

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April 29, 2025 04:00 ET (08:00 GMT)

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