Starbucks Corporation (NASDAQ:SBUX) has spent the past two years trying to fix a business that had lost some of what made it special. Stores had become slower, employees were under pressure, the customer experience was inconsistent, and the company had become too focused on growing rather than making its existing stores better.
Brian Niccol’s answer has been to go back to the basics. The early results suggest that this is more than a temporary improvement in sales. Starbucks has now delivered four consecutive quarters of positive comparable-store sales, while margins have expanded for two straight quarters.
But the bigger question is whether Starbucks can turn that recovery into a much more profitable business.
In June, we published an article about 10 best American stocks to buy and hold for the next decade. Starbucks ranked fifth on that list. The #1 stock in that list returned roughly 30% since the article was published.
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Starbucks is fixing the store first
The interesting part of the turnaround is that Starbucks is not relying on one big product or promotion to bring customers back. It is trying to make its stores work better.
Its Green Apron Service model has changed staffing, store routines, and accountability. Starbucks says food availability is now close to 99%, about 10 percentage points better than a year earlier. Store leadership is also becoming more stable, which matters because a coffeehouse with experienced managers and employees should be better equipped to deliver the same experience every day.
The improvement is showing up in traffic. U.S. comparable sales increased 7.9% in the latest quarter, with transactions up 4.2%. Pricing contributed less than one percentage point to average-ticket growth.
That is important. Starbucks is not simply getting customers to spend more because coffee costs more. More people are actually coming back.
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The bigger opportunity may be inside existing stores
Starbucks does not necessarily need to grow by opening thousands of new locations.
Morning traffic has been the biggest success so far, but management believes there is still room to increase afternoon visits. Refreshers, energy drinks, food, and other menu innovations are giving customers more reasons to visit outside the traditional morning coffee run.
This matters because a store that serves more customers throughout the day can become much more productive without requiring another physical location.
Starbucks is also refurbishing stores through relatively inexpensive “uplifts,” which add seating, warmth, and other elements of the coffeehouse experience. More than 1,000 had been completed by the latest quarter, and management says these stores are showing higher transactions across different dayparts and ordering channels.
That could prove more valuable than it initially sounds. Starbucks is essentially trying to get more out of the physical network it already owns before aggressively expanding it.
The real test is earnings
This is where the turnaround becomes harder.
Getting customers back is encouraging. Getting those customers back while producing much higher profits is what will determine whether Starbucks is actually fixed.
Starbucks’ consolidated operating margin reached 14.4% in the latest quarter, up 430 basis points year over year. But the company is still spending heavily on labor, store improvements, technology, and its broader turnaround. It also has a $2 billion cost-savings program running through fiscal 2028.
The important question is whether Starbucks can eventually keep the better customer experience while allowing more of its sales growth to reach the bottom line.
So far, the signs are encouraging. Management said sales leverage and cost savings are already helping margins, and it raised fiscal 2026 adjusted EPS guidance to $2.55-$2.65.
But Starbucks does not need to return to its old model. It needs to build a better one.
China is becoming a different opportunity
Starbucks Corporation has also changed its approach to China, moving its retail operation into a joint venture in which it retains 40%.
That makes the business more capital-light and gives the local partner greater responsibility for expansion. Starbucks still sees the potential for the Chinese business to reach up to 20,000 stores.
There is a trade-off, though. Starbucks will no longer capture the full economics of those stores, and China’s coffee market has become far more competitive.
That may actually be a healthier way for Starbucks to approach the market. The company can participate in long-term growth without having to put as much of its own capital behind every new store.
The stock is already pricing in a recovery
At 30.86x forward earnings, Starbucks is not being valued like a struggling restaurant company.
That does not automatically make the stock expensive. If the company restores its margins while continuing to grow comparable sales, today’s earnings could prove to be a temporary trough.
But investors are already paying for part of that recovery.
Starbucks needs to show that better stores can produce better economics for years, not just that customers are returning today. It also needs to prove that its investments in labor, technology, and store improvements generate enough sales and productivity to justify the spending.
Conclusion
Starbucks’ turnaround looks increasingly credible because the improvement is showing up in traffic, store operations, and margins. The harder part is still ahead. At 30.86x forward earnings, investors need the recovery to become a durable earnings story.
What Starbucks is doing is commendable, but the stock needs more than a few good quarters. It needs to prove that a better Starbucks can also be a much more profitable Starbucks.
Market Sentiment
Hedge fund sentiment toward Starbucks remained broadly stable in the second quarter. According to Insider Monkey’s database, 64 hedge funds held Starbucks in Q2, down slightly from 65 in Q1, while the value of those positions increased from $1.98 billion to $2.63 billion. The small decline in fund ownership was more than offset by the increase in capital invested, suggesting existing hedge fund investors became more confident in the stock.
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This article is originally published at Insider Monkey.
