Starbucks (SBUX.US) received “support” before the results: the current valuation did not fully reflect the profit rebound in fiscal year 2027, the key focus was on operating leverage and profit margin expansion

The Zhitong Finance App learned that Starbucks (SBUX.US) will announce its financial results for the fourth quarter of the 2026 fiscal year on October 29. In a research report released recently, Morgan Stanley believes that Starbucks's Q4 revenue performance in the US market is still good, and maintains the forecast of 7% increase in same-store sales. The bank raised its earnings per share (EPS) forecast for Starbucks Q4 and the 2026-2028 fiscal year, and indicated that room for upward operating leverage and profit margins will be the key to the 2027 fiscal year results. The attractiveness of the stock has increased after the recent correction in its price, but there is still analysis in the market. The bank maintained an “excess” rating on Starbucks until the earnings report was announced, and the target price was 115 US dollars. This target price has about 23% upside compared to the stock's closing price of $93.25 on Wednesday.

Dama's point of view

Damo pointed out that the market's views on Starbucks are still being analyzed. To a certain extent, the bank had previously predicted that until earnings continued to recover, the stock would remain range-bound, yet profit recovery is still in its early stages. The bank believes that this is more related to issues related to the industry as a whole and at the consumer level. It may also reflect a slowdown in Starbucks' growth at the end of the quarter, but it does not believe this poses a risk to the bank's forward-looking profit forecasts.

Damo said that Starbucks' revenue performance for the 2026 fiscal year exceeded market expectations, and the stock had performed well until recently. Given these circumstances, the bank believes that looking ahead, there aren't many new changes at the core of the market debate — as large-scale labor investments enter the comparative base period, while cost reduction plans continue to advance, the key to fiscal year 2027 will be upward operating leverage and margin. Commodity prices may present some risk to this expectation, but coffee prices are moving in a favorable direction.

Profits exceeding expectations will be the key to driving up stock prices, and Damo believes this is possible under current circumstances. The bank expects the FY2027 performance guide to position EPS at around $3 (Damo's forecast is $3.18, the market's consensus forecast is $3.15), and based on this, it will gradually move towards the 2028 EPS target of $3.35 to $4.

As Starbucks stock prices fall back to what Damo believes are more normal valuation multiples, the bank believes that the current stock price does not fully reflect the profit rebound in line with the bank's own profit predictions, nor does it reflect the high level of the company's target range.

Q4 Revenue: Maintaining 7% increase in same-store sales in North America

Regarding Q4 revenue performance, Damo maintained the forecast of 7% increase in same-store sales in North America, which was slightly higher than the market's agreed expectations. According to the bank's interpretation of third-party data, and the pace of product launches this quarter still supports this forecast — and may even be slightly better than expected — this may support the stock price.

This quarter included a number of notable new product launches. Among them, Unicorn Frappuccino (Unicorn Frappuccino), which returned for a limited time, drove Starbucks to record the highest sales weekend in history at North American company stores; while the fall menu launched on August 25 became the strongest performing fall product launch in the company's history.

Damo raised its forecast for same-store sales growth in the international market from 2% previously to 3%. Currently, the number of stores covered by the international market is relatively limited.

In addition, Damo also included the factor that Starbucks announced the closure of about 250 North American stores at the end of the quarter into the model. Considering the timing, these store closures will have little impact on Q4 sales, and the lower number of stores will be reflected in the 2027 fiscal year results.

This quarter's performance seems to have been strongest at the beginning, but Damo believes that recent trends still support same-store sales in FY2027 meeting or exceeding the agreed market expectations. Currently, the market's consensus forecast is 4.7%. Closing stores will have an impact here — the benefits brought about by closing last year will gradually fade, and a new round of store closures may also have some impact.

Q4 profit: EPS forecast raised, FY26/27/28 overall increase

Regarding Q4 earnings performance, Damo raised the Q4 EPS forecast from $0.67 to $0.71, which is in line with the market's agreed expectations; at the same time, it raised the FY26/FY27/FY28 EPS forecast from $2.58/3.07/3.67 to $2.62/3.18/3.70, respectively.

As labor investment entered the comparative base period last year, operating leverage is likely to bring some room for improvement in performance. Most of this forecast adjustment reflects structural changes after the international business joint venture, which is more fully reflected in the bank's model, and the bank's views on North America's profit rate have remained largely unchanged.

Damo added that about 250 North American stores that closed in the last week of September have been included in the number of stores and revenue forecasts for the 2027 fiscal year, including the offset effect of some sales transfers. However, since these store closures occurred at the end of the quarter, there was little impact on FY2026 Q4.

At the same time, Damo rolled the valuation benchmark forward to the 2028 natural year, but currently using a lower valuation multiplier, the previous 35 times was lowered to 30 times, and the final target price remained unchanged at 115 US dollars. The bank believes that as Starbucks gradually achieves a healthier profit margin level and a more normalized growth rate, this valuation multiple will tend to decline.

If investors are bullish, 2028 may still be a year where profit potential has not been fully unlocked, but its performance should be closer to potential levels. The bank shares the view that at this stage, the upward space for stock prices will mainly come from profits exceeding expectations.

Views on FY2027 Earnings Guidelines

The FY2027 same-store sales guide is likely to start at a level of 3% or more, but Damo believes that the performance at the beginning of FY2027 may be higher than this level, and Starbucks is also likely to guide this. The bank believes that for the stock to perform well next year, actual performance needs to be better than this level. This still means that future growth may slow down from current trends. The bank currently expects same-store sales in North America to grow by 4.4% in fiscal 2027, slightly higher than the market's consensus forecast of 4%.

Key drivers for FY2027 include store refurbishment, continued optimization of services/technology/marketing, possible further improvements in the food business, and possible moderate price increases.

The performance of the international market is likely to be slightly lower. Currently, same-store sales in the international market have increased by about 4% from the beginning of the year to date, compared to 6% in North America. Damo anticipates that part of this gap will continue in FY2027, so same-store sales in the international market are expected to grow by 3.4% in FY2027, which is slightly higher than the 3.1% expected by the market.

As sales recovery is now more stable, Damo believes that the greater focus of debate in FY2027 will shift to profit-side transmission, as the largest investments have already entered the comparative base period. The bank expects EPS of $3.18 for the 2027 fiscal year, which is higher than the market's consensus estimate of $3.15. The bank believes it is possible for the company to give EPS guidance of about $2.90 to $3.30, which will be a transition phase from $2.55 to $2.65 this year (this figure has been gradually increased over the course of this year) to the 2028 target of $3.35 to $4.00.

Profit margin expansion should be driven by the following factors: operating leverage from increased sales, ongoing $2 billion cost savings plans, investment in Green Apron Service services entering a comparative base period, and lower coffee prices. However, continuing to reinvest in employees will partially offset these benefits.

In terms of the number of stores, Damo predicts that after closing about 250 North American stores at the end of FY20265 Q4, store development will gradually accelerate. The growth rate of the entire store system will increase from about 1% in FY2026 as estimated by the bank to about 3% in FY2027, and gradually move closer to about 5% in the next few years of the model forecast period.

The US market is unlikely to begin to expand at an accelerated pace before FY2028 (and there is still controversy about whether this expansion can reach a substantial scale), but both the US and overseas markets closed during the 2026 difficult period, so the scale of store closures in FY2027 should be reduced.