After Earnings, Is Starbucks Stock a Buy, a Sell, or Fairly Valued?

Starbucks SBUX released its fiscal first-quarter earnings report on Jan. 28. Here’s Morningstar’s take on Starbucks’ earnings and stock.

Key Morningstar Metrics for Starbucks

• Fair Value Estimate: $86.00
• Morningstar Rating: ★★
• Morningstar Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Starbucks’ Q1 Earnings

Given that Starbucks’ SBUX turnaround is in its early stages amid a challenging restaurant landscape, expectations were tempered going into the firm’s fiscal 2025 first-quarter report. Although sales of $9.4 billion were flat and exceeded our $9.3 billion estimate, its earnings per share of $0.69 fell $0.03 short. We don’t anticipate making a material change to our fair value estimate of $86 per share.

While we remain positive about management’s efforts to bolster its brand positioning through in-store investments, process improvements, and menu innovation, we think investors are overly optimistic about the firm’s near-term recovery amid industrywide traffic challenges, heightened promotional activity, and competition from the grocery channel.

Domestically, Starbucks’ 4% comparable sales decline aligned with our expectations, as traffic declines sequentially moderated to 8% in the quarter (from 10%). We surmise a milder decline was supported by strategic initiatives (like eliminating fees for nondairy milk customizations) following prior challenges in engaging its core consumer base. Additionally, nonloyalty member traffic increased, which we attribute to the early impact of a shift toward external advertising, and discounted transactions declined 40% year over year. We view this shift toward brand positioning over discounting as a prudent strategy that reinforces Starbucks’ premium positioning. Alongside efforts to reduce wait times, streamline the menu by eliminating 30% of its offerings, and enhance store environments with renovations (among others), we expect US comparable sales growth to average around 4% over the next decade.

In the quarter, growth initiatives pressured profitability, with the operating margin down 380 basis points to 11.9%, below our 12.6% estimate. While investments to maximize efficiency will likely weigh on near-term margin performance, we continue to see expansion to around 18% in 2034 from 15% in 2024.

Fair Value Estimate for Starbucks

With its 2-star rating, we believe Starbucks’ stock is overvalued compared with our long-term fair value estimate of $86 per share. With consumer demand faltering, we expect sales growth of just 3.4% in fiscal 2025, suggesting Starbucks barely defends its global market share. The growth we forecast is largely driven by net new stores (4.2% projected net openings), with comparable sales performance likely to remain muted as the firm tweaks its menu price architecture to provide better value for guests. In the longer term, the company’s prospects look salient, but it will be challenging to reverse declining traffic trends, and we don’t view its current slate of initiatives as likely to buck industry traffic trends for a couple of years. The ability to invest through the cycle distinguishes Starbucks from smaller peers, as the firm should be able to drive growth in systemwide sales despite material pressure on store-level sales, setting it up for long-term market share capture.

Our model includes 8% average annual top-line growth through 2034, with adjusted EPS growing at a 14% annual clip. Growth in the more mature North America segment favors comparable store sales, with 4.3% annual comparable sales growth outpacing 2.1% projected unit growth over that period. We expect the international segment, heavily skewed toward China, to generate 14% annual revenue growth, driven primarily by new unit openings (8%) as Starbucks continues to expand its reach into those markets.

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Economic Moat Rating

In our view, Starbucks is one of the few operators in our restaurant coverage that boasts a wide economic moat. The firm’s ability to generate excitement and traffic while spending less on marketing than category peers reinforces the importance of the brand and its impact on results. Moreover, the company benefits from a durable cost advantage, with its global scale allowing it to procure commoditized food and paper items at favorable prices. The firm’s scale lets it leverage technology spending across a larger store base, generating efficiency improvements and cost savings through automated inventory management, scheduling, and a robust omnichannel ordering platform, while a strong loyalty program increases its affinity with core customers.

Read more about Starbucks’ economic moat.

Financial Strength

We assess Starbucks’ financial strength as sound. The company targets a lease-adjusted debt/EBITDAR under 3 times, consistent with an investment-grade credit rating. While our fiscal 2025 projections see the firm remain slightly above this target at 3.2 turns, we expect Starbucks to return to under 3.0 times leverage by 2026 and remain there throughout the remainder of our forecast period. The restaurant operator also maintains access to an untapped $3 billion credit facility and a $3 billion commercial paper program, with the option to add an incremental $1 billion in capacity on the former if necessary.

Our forecast calls for Starbucks to return $24.5 billion to shareholders over the next five years, split between share repurchases ($9.2 billion) and dividends ($15.4 billion). We expect the firm’s dividend payout ratio to equilibrate between 50% and 55% over time, which looks appropriate.

Read more about Starbucks’ financial strength.

Risk and Uncertainty

We assign Starbucks a Medium Uncertainty Rating. The firm remains sensitive to consumer pressure, particularly at the lower end of the income spectrum (as seen in 2007-09), but its position as an affordable luxury may insulate it from minor downturns. Other key uncertainties include input cost inflation and operational risks.

Wage inflation remains a concern, with the firm raising its partner wages to an average of $17 per hour in the summer of 2022. The pace of change remains unprecedented—Starbucks' announcement of $15 average wages in 2020 was a landmark event just four years ago—and the labor market remains relatively tight across the restaurant industry. Broader traction of unionization efforts remains a tail-end risk, with the firm continuing to negotiate a union contract with nearly 500 of its domestic stores—a mid-single-digit percentage of its company-owned footprint in the US. Elsewhere, eyes turn to California, where legislators mandated a $20 minimum wage in the restaurant space effective in April 2024—perhaps a harbinger of similar changes in more politically liberal states like Oregon and Illinois.

Further, we view execution risks as substantial, with the firm remaining in the early innings of CEO Brian Niccol’s “Back to Starbucks” strategic plan. Market prices suggest a return to high-single-digit revenue growth, and our cash flow projections hang on the firm’s ability to maintainably drive traffic back into its stores after an extremely challenging fiscal 2024.

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Starbucks Bulls Say

• Starbucks’ “Connect” initiative should drive continued adoption of the firm’s loyalty program, materially increasing customer lifetime value and helping drive user acquisition.
• An emphasis on throughput and providing value for customers on every purchase occasion could drive defensible transaction share gains in a competitive global coffee category.
• Starbucks’ scale-driven cost advantage should defend its return profile even as it invests heavily in turning around its struggling business.

Starbucks Bears Say

• Challenges attracting lapsed customers could diminish the expected return on investment for CEO Brian Niccol’s “Back to Starbucks” strategic initiative.
• We expect substantially softer—if still attractive—cash-on-cash returns in China moving forward, rather than the 50%-70% Starbucks has historically enjoyed, as competition in that country remains extreme.
• Shrinking arabica growing regions could drive structurally higher green coffee prices, threatening gross margins (if swallowed by Starbucks) or driving consumers to switch to cheaper caffeinated alternatives.

This article was compiled by Aman Dagra.