On the coffee house chain revealing huge profit drops and plans, Starbucks shared huge gains and planned to spend more money on baristas, which almost eliminated the price increase after CEO Brian Niccol hired last summer.
Earlier on Wednesday, Starbucks fell as much as 11% per share to $75.50. This is higher than the company's most recent February high, and below the company's closing price is lower than the day before Nikkor arrived last August. Later that day, the price cuts losses.
Niccol was recruited to reverse sales after leading the successful turnaround of Chipotle Mexican Grill. Starbucks shares soared 24.5% the day he was hired, reflecting Wall Street's belief in his business acumen.
The U.S.-based cafe chain reported a quarterly revenue growth of 2% year-on-year to $8.8 billion, in line with expectations - but a 50% drop in net income to $384.2 million. It can be seen that analysts who conducted the survey predicted that quarterly profits were $551 million.
Niccol acknowledged the results were disappointing, but said his turnaround efforts would take time to pay off. "Our financial results have not yet reflected our progress, but the momentum of our Back to Starbucks program is the real driving force," he said in a video message.
He tried to reduce wait times for customers, simplify menus, and restore a passionate cafe feel as lost as more businesses moved online during the COVID-19 pandemic.
As part of his plan, Starbucks intends to spend more money on the barista while expanding a three-year-old cafe technology system to the ice as it emphasizes labor rather than gadgets to get customers back to the store.
“We found through our work that investment in the workforce, not equipment, is more effective in improving throughput and driving transaction growth,” he told analysts.
He said the company will stop part of the siren craft system that will unveil in 2022.
"We've actually been pulling out the labor force from the stores over the past few years, and I think the hope is that the equipment can offset the evacuation of labor," Nicole told analysts. "And I think all we found is - it's not an accurate assumption."
Starbucks employs 361,000 people worldwide, most of whom are in cafes. The barista complains about being overwhelmed during the busiest time of the day, and customers are frustrated by the long waiting time in-store and online orders.
Investments to improve cafes come at a cost: Starbucks said store operating expenses rose 12.1% to $4.2 billion in the quarter. The company said the additional labor support for Nicole’s “Back to Starbucks” strategy is one of the reasons store fees are integrated into profitability.
Starbucks said it opened 213 new stores in the second quarter, bringing its global total to 40,789. “While we have solid new store economics, we still have room for improvement and are evaluating our global store portfolio and new store pipelines,” said Cathy Smith, chief financial officer.
Starbucks faces increasingly difficult challenges when consumers face a trade war with U.S. President Donald Trump.
The Seattle-based company's global comparable store sales fell 1% in the second quarter ending in March, the fifth consecutive quarter of decline. US stores report a 4% drop in transactions over the year.
The 10% baseline tariff that Trump entered into force in April will increase the cost of coffee beans imported by Starbucks from countries such as Brazil and Colombia.
Starbucks says wholesale coffee prices (currently traded at a high price of over 4 pounds per pound) account for 10 to 15% of its product and distribution costs.