Starbucks (SBUX.US) received Citi's target price increase to $107 after the results: the growth logic shifts to profit margin expansion, but high valuations still require performance support

The Zhitong Finance App learned that Starbucks (SBUX.US) announced financial results for the fourth quarter of the 2026 fiscal year after the US stock market on October 29 (Thursday). According to financial reports, Starbucks' Q4 revenue was 9.14 billion US dollars, down about 4% year on year, lower than market expectations of 9.22 billion US dollars. The decline was mainly due to the fact that China's retail business was not consolidated after switching to a joint venture licensing model with Boyu Capital. The profit side showed strong performance, with net profit of US$677 million, a sharp increase of more than four times the previous year, partly reflecting a decrease in restructuring and impairment expenses; adjusted earnings per share of $0.80, up 54% year over year, higher than analysts' expectations of $0.72.

Global same-store sales increased 7.2%, a fifth consecutive quarter of positive growth, above market expectations of about 6%. Among them, same-store sales in the US increased by 7.7%, thanks to the refurbishment of the store and the strong performance of the coffee chain's fall menu products. The North American market grew by 7.9%; the international market increased by only 0.9%, lower than expected by 3.2%, as lower transaction volume offset the increase in customer unit prices.

Starbucks has attracted more customers through store upgrades, service improvements, menu updates, and more targeted marketing. At the same time, the company also closed hundreds of underperforming stores in order to focus on developing better performing stores. In September, around 250 stores in North America closed.

Citi pointed out in a newly released research report that Starbucks' investment logic appears to be changing. Previously, with same-store sales growth that exceeded expectations (same-store sales increased by 6.2% in FY2026, significantly exceeding the upper limit of its multi-year target range of 3% or more), the company is now gradually shifting to a slowdown in same-store sales growth (the 2027 target is 4%, the increase is more driven by customer unit price rather than customer traffic), and a more continuous and stable profit margin expansion.

In a context where the global consumer environment is still facing challenges, Citi believes that investors will still be willing to pay valuation premiums for brands that can achieve low to medium single digit (LSD-MSD%) same-store sales growth, profit margin expansion, and a ten-percent increase in earnings per share. However, the bank expects that the slowdown in revenue growth will continue to be the focus of market valuation discussions.

Considering that Starbucks's stock price currently corresponds to the price-earnings ratio of about 32 times Citi's earnings per share forecast for the 2027 calendar year, the bank believes that in order to maintain its current high valuation, Starbucks needs to achieve greater fundamentals than expected performance, especially in terms of same-store sales growth.

Citi also added key points from subsequent exchanges:

(1) Slowing down the pace of US store expansion. Recently, there have been some signs that Starbucks will adopt a more prudent strategy in opening new stores, and the store expansion curve is also slowing down. The company currently expects a net addition of about 300 stores in North America in the 2028 fiscal year, which is lower than the target of 400 self-operated stores previously proposed by Investors Day. However, slowing store expansion may have a mild positive impact on profit margins and same-store sales growth, including reducing the impact of new store openings on performance, reducing capital expenses, and reducing passenger flow between stores.

(2) Accelerate the progress of store renovation. Starbucks completed the renovation of 1,700 stores in FY2026, surpassing the previous target of 1,500; the target for FY2027 was over 2,000. Starbucks said that store refurbishment can increase sales and transaction volume during different business hours and consumer touchpoints, but the company did not quantify the specific increase. This is probably one reason the company is confident that same-store sales will grow 4% or more over the next year.

(3) There are no new developments in the transfer of potential franchises for the Japanese business. Management is satisfied with the performance of the Japanese business in FY2026, although the Japanese market is likely to experience negative growth in same-store sales in the fourth quarter of FY2026. However, in the long run, the company wants to adopt an asset-light operating model in markets other than the US.

(4) Store closures and business transfers contributed about 200 basis points to the increase in same-store sales in the US. Store closures and business transfers contributed about 200 basis points to the increase in same-store sales in the US; the pricing and distribution business contributed 260 basis points to the increase in customer unit prices; additional purchases and product portfolio changes contributed a further 260 basis points. For the 2027 fiscal year, Starbucks expects its 4% same-store sales growth target to be driven more by the increase in customer unit prices, including some of the benefits from rising prices (the current price increase is still below the level of inflation).

(5) Restarting share repurchases for the first time since FY2024. Starbucks will relaunch its share repurchase program for the first time since FY2024 and is committed to repurchasing approximately $1 billion of shares in FY2027.

Citi adjusted its earnings forecast for Starbucks FY2027 and FY2028 from $3.15 and $3.60 to $3.20 and $3.55, respectively, due to recent better-than-expected same-store sales performance. The bank gave Starbucks a “neutral” rating, and the target price was raised from $104 to $107. The target price is based on the EBITDA forecast for the next 12 months, that is, 12 months from now, using a valuation multiplier of 19 times (about 1.4 times the market average, compared to 1.3 times previously). Against the backdrop of the company confirming that the operating leverage effect is returning, the bank raised the corresponding valuation multiplier.