Rising Labor Costs And Shifting Tastes Will Weaken Profitability

Key Takeaways

• Evolving consumer preferences and sustainability concerns are challenging Starbucks' traditional offerings, while regulatory and input cost pressures erode margins and constrain store-level profitability.
  
• Labor cost inflation, unionization, and over-reliance on mature U.S. markets limit flexibility, restrict revenue expansion, and delay any sustained earnings recovery.
  
• Starbucks is driving long-term growth through global expansion, operational streamlining, digital innovation, menu upgrades, and improved employee engagement to strengthen earnings and customer appeal.

Catalysts

Operates as a roaster, marketer, and retailer of coffee worldwide.

• Rapidly shifting consumer preferences towards health and wellness, combined with heightened focus on sustainability and regulatory scrutiny, are likely to continue eroding demand for Starbucks' traditional, sugary beverage portfolio and increasing operational costs tied to changes in single-use packaging, directly pressuring same-store sales growth, gross margin, and capital expenditures in future years.
  
• Persistent wage inflation and tightening labor markets are forcing Starbucks to increase labor investments just to maintain service standards, with management acknowledging substantial margin compression due to higher operating costs-a trend that is unlikely to reverse and will result in structurally lower net margins and delayed earnings recovery.
  
• Over-reliance on the US market leaves Starbucks highly exposed to North American market saturation and macroeconomic headwinds, and as store growth slows for reevaluation and cost containment, revenue expansion opportunities will become increasingly limited, endangering long-term topline growth.
  
• Unionization efforts and ongoing labor activism risk driving further wage and benefit inflation, while also reducing operational flexibility; this will keep SG&A expenses elevated and limit the company's ability to capture operating leverage, resulting in persistent earnings per share and ROIC underperformance.
  
• Intensifying competition from both specialty cafés and value chains in key markets, coupled with rising volatility in coffee and input prices, will force Starbucks to either absorb higher costs or resist price increases to protect its value proposition, undermining both average ticket growth and gross profitability well into the next several years.

Starbucks Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Starbucks compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Starbucks's revenue will grow by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.6% today to 9.6% in 3 years time.
• The bearish analysts expect earnings to reach $4.1 billion (and earnings per share of $3.68) by about June 2028, up from $3.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, down from 33.8x today. This future PE is greater than the current PE for the US Hospitality industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Starbucks Future Earnings Per Share Growth

Risks

• Starbucks is advancing a global turnaround strategy focused on customer-centric improvements, reinvigorating its service model, simplifying operations, and expanding its innovation pipeline, with early signs of transaction growth and improved customer experience, which can translate into higher revenue and stronger long-term growth.
  
• The company continues to open net new stores internationally, particularly in China and other underpenetrated markets, with executives expressing high confidence in the ability to eventually double the U.S. store base, pointing toward robust global expansion and an expanding revenue base over time.
  
• Investments in technology and digital platforms, including app enhancements, algorithm-driven order sequencing, and digital menu boards, are showing operational benefits such as higher throughput, improved speed of service, and increased customer satisfaction, which are likely to support greater retention, higher ticket size, and margin recovery in future periods.
  
• Menu innovation focused on healthier, culturally relevant, and premium offerings-including plant-based, artisanal food, and new beverage platforms-shows traction in both established and international markets, supporting premiumization, premium pricing, and the ability to tap into shifting consumer tastes, all of which can bolster sales and support margin expansion.
  
• Strong improvements in partner (employee) engagement and operational efficiency-evidenced by record-low turnover and higher tenure-along with disciplined cost management initiatives, position Starbucks to capture more value per transaction and drive durable improvements in earnings and profitability over the long term.

Valuation

• The assumed bearish price target for Starbucks is $69.94, which represents two standard deviations below the consensus price target of $92.19. This valuation is based on what can be assumed as the expectations of Starbucks's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $69.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $42.7 billion, earnings will come to $4.1 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $93.12, the bearish analyst price target of $69.94 is 33.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.