Starbucks Stock Drops. Earnings Offer a Glimpse at Company’s Turnaround Plans.

Starbucks’ same-store sales rose 1% from a year ago, but margins fell. (Tibrina Hobson/Getty Images)

Key Points

• Starbucks’ adjusted earnings of 52 cents per share missed estimates of 56 cents per share, impacting profit growth.
• Revenue increased 5% year over year to $9.6 billion, exceeding forecasts of $9.3 billion.
• Same-store sales rose 1% from a year ago, ending a six-quarter decline, despite an 11.5 percentage point drop in operating margins.

Starbucks reported fiscal fourth-quarter earnings that fell short of expectations. While the stock initially rose on news that the company’s same-store sales had finally turned positive, shares have since fallen into the red.

Starbucks’ adjusted earnings of 52 cents a share came in below consensus estimates calling for 56 cents a share, according to FactSet.

The company’s “Back to Starbucks” turnaround plan weighed on profit growth this quarter. Unadjusted operating margins fell 11.5 percentage points year over year, partially because of investments in more labor hours, as well as costs associated with closing coffeehouses—Starbucks shuttered 107 stores throughout the quarter. In September, the company announced it was closing hundreds of coffee shops and laying off 900 corporate employees as part of a $1 billion restructuring effort.

That said, the company’s top-line performance was stronger. Revenue rose 5% year over year to $9.6 billion, better than forecasts for $9.3 billion.

Same-store sales, or sales at stores open for more than a year, increased 1% from a year ago, breaking a six-quarter streak of declines. Analysts were expecting same-store sales to dip by 0.3%.

Starbucks stock fell 1.8% in premarket trading on Thursday. Shares are down 7.8% this year.

“We’re a year into our ‘Back to Starbucks’ strategy, and it’s clear that our turnaround is taking hold,” said CEO Brian Niccol. “Our return to global comp growth and the momentum we’re building give me confidence we’re on the right path to deliver the very best of Starbucks for our customers, partners and shareholders.”

Niccol’s plan aims to boost the coffee chain’s sales and bring customers back in stores by improving the cafe experience, increasing staffing, and fine-tuning the company’s menu to cater to shifting consumer demand.

The improvement in same-store sales suggests Starbucks is making headway. North America and U.S. same-store sales stabilized, coming in flat this quarter instead of in the red. But the company still faces a challenging macroeconomic setup as it looks to execute the next stages of its plan.

Years of rising prices have made Americans pull back on dining out this year, particularly at fast-casual restaurants. Instead, they’re shopping at grocery and convenience stores—and when they do eat out, they’re focused on value, notes Nick Setyan, an analyst at Mizuho who initiated coverage of the sector on Monday. That puts Starbucks at a disadvantage, given that many competitors offer products at lower price points, Setyan says.

“A cup of coffee at Starbucks is too expensive and selling coffee is too profitable for smaller peers not to gain share,” Setyan wrote.

Corrections & Amplifications: Starbucks’ unadjusted operating margins contracted 11.5 percentage points in its fourth quarter. A previous version of this article inaccurately reported they fell by 7.1 percentage points.

Write to Sabrina Escobar at sabrina.escobar@barrons.com