SBUX: Turnaround And Labor Disputes Will Shape Traffic And Margin Recovery

Analysts have nudged their average Starbucks price target slightly higher by about $0.20 to approximately $94.20. This reflects a view that while revenue growth and profit margins may face near term pressure amid macro headwinds and a slower turnaround, the company’s long term earnings power and valuation multiple remain intact.

Analyst Commentary

Street research on Starbucks paints a mixed but generally constructive picture, with recent target cuts reflecting tempered expectations for near term growth rather than a loss of confidence in the turnaround or long term earnings power.

Bullish Takeaways

Bullish analysts highlight sequential traffic improvement, including recent positive trends, as evidence that turnaround strategies and store level initiatives are beginning to gain traction.
Some see solid comparable sales results in both North America and international markets as supportive of a gradual return to more normalized growth and margin expansion over time.
Improved service levels and strong response to recent menu offerings are viewed as reinforcing brand relevance and pricing power, which are key pillars for sustaining the Starbucks valuation multiple.
Restructuring actions, including targeted store closures and cost reductions, are seen as laying the groundwork for leaner operations and enhanced earnings leverage once demand normalizes.

Bearish Takeaways

Bearish analysts are marking down price targets to reflect slower anticipated top line growth and ongoing macro headwinds, which could cap multiple expansion in the near term.
There is concern that progress on strategic initiatives is likely to be limited in the next few quarters, with Q4 trends still challenged and margins under pressure as investments and inflation weigh on profitability.
Some view the setup into upcoming earnings as messy, citing store closures, weaker industry demand and limited visibility into the timing of a full transaction recovery.
The longer than expected turnaround timeline raises execution risk, leading more cautious analysts to favor a wait and see approach on the pace of traffic and earnings inflection.

What's in the News

Unionized Starbucks baristas are staging walkouts in at least 40 cities, with more than 1,000 workers at 65 cafes participating in what could become their largest strike to date, as they push for a first union contract and resolution of legal disputes (Bloomberg).
U.S. lawmakers, including 26 senators and 82 House members, have urged Starbucks CEO Brian Niccol to resume good faith contract talks with the company’s workers union and bargain a fair deal with employees (Reuters).
A group of long term Starbucks investors, including New York City Comptroller Brad Lander and several investment organizations, is pressing the company to restart negotiations with Starbucks Workers United to address staffing, wages, and broader labor issues (Reuters).
Starbucks plans for unionized baristas to strike on November 13, the company’s busy Red Cup Day, as Starbucks Workers United seeks leverage after years of stalled negotiations on a contract covering about 550 stores (Bloomberg).
Amid falling same store sales, Starbucks is slowing new store openings and closing hundreds of locations, which is straining relationships with landlords who had built out custom spaces expecting long term tenancy (Financial Times).

Valuation Changes

The Fair Value Estimate has risen slightly, moving from about $94.10 to approximately $94.19 per share, implying a negligible upward adjustment in intrinsic value.
The Discount Rate has increased modestly from roughly 8.93 percent to about 8.99 percent, reflecting a slightly higher required return or perceived risk profile.
Revenue Growth has fallen moderately, with the long term assumption easing from around 5.68 percent to about 5.10 percent annually.
The Net Profit Margin has declined from roughly 9.49 percent to about 8.86 percent, indicating expectations for somewhat lower profitability over the forecast horizon.
The future P/E multiple has risen meaningfully, from approximately 33.3x to about 36.4x, suggesting a higher valuation being applied to forward earnings despite softer growth and margin assumptions.

The Back to Starbucks strategy and Green Apron model aim to enhance customer experience and reduce service times, increasing transactions and potential revenue.
Expanding in growth markets and focusing on local execution, particularly in China, is expected to boost global revenue and mitigate risks.
Increased labor investments and rising costs pose challenges to margins, while economic uncertainty threatens revenue growth and requires strategic adjustments.

Catalysts

About Starbucks

Operates as a roaster, marketer, and retailer of coffee worldwide.What are the underlying business or industry changes driving this perspective?

The Back to Starbucks strategy aims to improve partner engagement and reduce turnover, which is expected to enhance the customer experience and drive higher quality transactions, potentially increasing revenue and net margins.
Plans to reestablish Starbucks as a third place by evolving coffee house designs and expanding in attractive growth markets could lead to increased customer visits and improved unit economics, thus boosting revenue.
The rollout of the Green Apron service model, focusing on labor rather than equipment, is expected to improve throughput and reduce service times, leading to increased transaction growth, potentially impacting revenue and margins.
Implementing a more aggressive marketing and menu innovation strategy, including new product launches and better price transparency through the Starbucks app, aims to drive higher engagement and demand, potentially increasing revenue and earnings.
The international growth strategy and focus on local execution in key markets, such as China, are expected to mitigate risk and drive future growth, positively impacting Starbucks’ global revenue and earnings.

Starbucks Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Starbucks's revenue will grow by 7.5% annually over the next 3 years.
Analysts assume that profit margins will increase from 7.2% today to 10.1% in 3 years time.
Analysts expect earnings to reach $4.6 billion (and earnings per share of $4.14) by about September 2028, up from $2.6 billion today.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 36.2x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 9.21%, as per the Simply Wall St company report.

Starbucks Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The company's comparable store sales declined by 1%, indicating challenges in maintaining consistent revenue growth internationally and a need for operational improvements to bolster future revenue and earnings.
A significant contraction in operating margin by 450 basis points due to labor investments suggests a risk to net margins and indicates that higher costs could continue to pressure earnings before the expected benefits from investments materialize.
Uncertainty regarding the macroeconomic environment and the potential for a recession could impact consumer spending, posing a risk to Starbucks' traffic and overall revenue in the U.S. market.
Implementation challenges and the time required to fully realize the benefits of the Back to Starbucks strategy could result in continued margin pressures and subdued earnings in the near term.
Rising costs for new store builds and renovations necessitate adjustments in Starbucks' growth strategy, potentially slowing new store openings and affecting revenue growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $99.379 for Starbucks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $73.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $45.5 billion, earnings will come to $4.6 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 9.2%.
Given the current share price of $83.81, the analyst price target of $99.38 is 15.7% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Have other thoughts on Starbucks?

Create your own narrative on this stock, and estimate its Fair Value using our Valuator tool.

Create Narrative

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.