Starbucks Faces Brand, Margin Headwinds As Analysts React To Disappointing Q2

Starbucks Corp SBUX on Tuesday reported worse-than-expected results for the second-quarter FY25. Analysts from various brokerages have provided their comments on the coffee house giant’s performance.

Goldman Sachs analyst Christine Cho downgraded the shares from a Buy to a Neutral rating and lowered the price target from $103.00 to $85.00.

The analyst cited weakening brand momentum and a slower-than-expected sales recovery in North America as the main reasons for the downgrade.

Despite recent operational changes under CEO Brian Niccol, including a revamped menu and faster service goals, key customer engagement metrics continue to decline.

Foot traffic shows modest stabilization, but not enough to suggest market share gains, the analyst said, citing rising macroeconomic and geopolitical uncertainties, along with higher costs, which add further pressure.

HundredX data reveals that SBUX continues to trail behind its coffee industry peers in consumer sentiment. Both its Net Purchase Intent (NPI) and Net Promoter Score (NPS) have declined year-to-date and remain below the category average.

Due to rising tariff uncertainty and a weakening inflation outlook, the analyst expects continued pressure on SBUX North America same-store sales growth (SSSG) in fiscal 2025. Forecasts predict a 1% decline in SSSG, driven by a 4% decrease in traffic.

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Current data from Placer and Second Measure show no significant recovery in foot traffic or sales, suggesting that ongoing headwinds even predated the materialization of tariff impacts, noted the analyst.

RBC Capital Markets analyst Logan Reich reiterated an Outperform rating on the shares and lowered the price forecast from $100.00 to $95.00.

SBUX posted mixed results in the second quarter, with North American same-store sales aligning with forecasts but international markets, especially China, outperforming expectations.

Licensed store revenue fell short, impacted by reduced foot traffic at franchisee locations. For the third quarter, the company anticipates a 3% drop in sales and flat revenue in North America, missing market projections.

Starbucks is rolling out a new labor model to improve service speed, currently in 700 stores and aiming for more than 3,000 by the end of the fiscal year. While this has led to quicker service times, higher labor costs may pressure profit margins, noted the analyst.

Coffee and tariff-related costs pose additional margin risks. Although Starbucks hedges coffee prices, recent spikes could soon impact its financials.

Management indicated that 50% of its tariff exposure is tied to coffee, 25% to Chinese merchandise, and 25% to other imports, though exact margin impacts were not disclosed.

The company is also slowing unit growth, reassessing underperforming stores, and shifting focus from coastal markets to the U.S. interior and South.

Elevated build costs and lower returns have led to increased closures, although Starbucks remains committed to doubling its U.S. store count, the analyst concluded.

Price Action: SBUX shares were down 5.6% to $80.05 on Wednesday.

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