Starbucks Earnings: Turnaround in Early Stage as Q2 Disappoints

Key Morningstar Metrics for Starbucks

• Fair Value Estimate: $87.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Starbucks’ Earnings

Starbucks SBUX grew sales by 2% in the second quarter as its global comparable sales decline of 1% was more than offset by store expansion. Adjusted operating margin fell 450 basis points to 8.2%.

Why it matters: Despite higher marketing and labor spending, weak traffic drove same-store sales down 2% in the core US market. Flat comp sales in China improved sequentially on more effective brand messaging, but demand headwinds persisted.

• Management is prudent to focus on staff hospitality and a streamlined consumer experience (including shorter wait times), but we expect Starbucks’ planned switch to higher store staffing (versus equipment automation) to achieve its goals will drive choppy profits in the coming quarters.
• We expect the coffee chain to refrain from price increases in 2025 but to leverage zero-based budgeting, procurement savings, and productivity initiatives to offset green coffee cost inflation and higher store investments.

The bottom line: We don’t plan any material changes to our $87 per share fair value estimate for wide-moat Starbucks. Shares look undervalued after a 6% fall in after-hours trading as the market prices in prolonged weakness versus our forecast for comparable sales and margins to rebound in 2026.

• While we plan to trim our 2025 estimates following two soft quarters, our 10-year forecasts for 8% annual sales growth and a 15% average operating margin remain in place. Both metrics are consistent with averages achieved over the past decade.
• Despite current challenges, we think stepped-up investments in consumer experience should reinforce Starbucks’ brand strength and drive a traffic turnaround in the medium term, fueling low-teens annual growth in operating profits.

Coming up: We expect Starbucks to slow the pace of store openings and focus instead on store renovation and operational enhancement. Over the next decade, however, we think Starbucks remains on track to grow its store base by 70% from 2024, a 6% annual increase.