Starbucks Earnings: We Expect to Lower Fair Value Estimate on Poor Medium-Term Outlook

Key Morningstar Metrics for Starbucks

• Fair Value Estimate: $95.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Starbucks’ Earnings

Starbucks SBUX is headed in the right direction, but it seems the firm will take substantial time and capital to get there. Consistent with the views expressed in our Oct. 22 note after the firm previewed its fourth-quarter earnings, we are disappointed that US traffic fell by a striking 10% and expect costly remedial measures as we move into fiscal 2025. We expect to lower our fair value estimate of $95 per share by a high-single-digit percentage, leaving the stock looking slightly expensive as reported results aligned with the earnings preview.

While we’re encouraged by CEO Brian Niccol’s efforts to port best practices from his time at Taco Bell and Chipotle Mexican Grill CMG to the beleaguered coffee chain, it’s challenging not to see those priorities in terms of dollars and cents. During the earnings call, Niccol mentioned an increase in marketing to non-Starbucks Rewards members, store remodels to prioritize the in-cafe experience, the rollout of Clover Vertica machines to all stores by fiscal year-end 2025, an acceleration of the rollout of Siren equipment and processes, an increase in barista hours during peak hours, investments in order sequencing for mobile orders, and a manager conference in 2025. While these will be partially funded by targeted operational savings, the rollback of brand-dilutive and ineffective promotional activity, and a pullback on store development, we envision a large step-up in capital and operating expenditure in the medium term that is unlikely to be offset by comparable-store sales growth for a handful of years.

Ultimately, we expect this approach to pay dividends slowly in the form of a return to more maintainable, traffic-led growth by fiscal 2026. However, it has become clear that we underestimated the scope of Starbucks’ operational and store estate issues. Consistent with our earlier note, we expect margins to trough in fiscal 2025 around 12% before gradually recovering as stores return to transaction-led growth.