Starbucks

Starbucks will close about 250 North American units, or 1% of its global footprint, that it deems unfit to meet its elevated store-experience standards or financial performance. It now expects 440 net global openings in fiscal 2026 (from 600-650) and will incur $300 million in restructuring charges.

Why it matters: Starbucks is investing in service, menu, marketing, and remodels to lure customers back to its shops. To maximize its return on investment, the firm is now pruning underperforming stores, about a year after its last closure announcement. We think Starbucks is judiciously repositioning its assets to boost the health of its footprint and ensure a consistent experience. We posit closed-store sales aren't entirely lost, as many consumers shift to nearby stores, attributable to about half of the last quarter's comparable sales growth. In our view, this transfer in sales can boost productivity and, in turn, unit-level profits of its existing base. We expect the firm to reposition its focus to new stores in higher-return, underdeveloped markets and its accelerated remodeling program.

The bottom line: We don’t plan a material shift to our $86 per share fair value estimate for wide-moat Starbucks in balancing the closure impact with second-quarter comparable sales and margin outperformance. At current levels, we think shares trade within a range we consider fairly valued. For fiscal 2026, we plan to trim our 644 net new store build estimate and bake in $300 million in restructuring charges, of which $100 million is noncash. We also expect to increase our 5% global comparable sales growth figure. Starbucks' shares are down 13% over the last month, a steeper decline than the Morningstar US Consumer Cyclical Index's 6% drop. We surmise the stock could become attractive if investors overly shun the brand due to broader macroeconomic woes and scrutinize its long-term prospects too closely.

We’ve raised our fair value estimate for Starbucks to $89 per share from $86, reflecting better-than-anticipated comparable sales growth and profitability, as its turnaround efforts appear to be bearing fruit. We now forecast fiscal 2026 North American comparable sales growth of 6.2%, up from 5.3% prior. Additionally, we've lifted our firmwide 10-year average adjusted operating margin to 16% from 14.7%. This was partially offset by 250 North American store closures expected in the fourth quarter and a lower revenue contribution from its licensed China business than we anticipated. Our valuation implies a fiscal 2027 enterprise value/EBITDA of 18 times.

With Starbucks’ deal with Boyu Capital now finalized, we’ve included the China segment in the firm's international arm as a fully licensed business. Although Starbucks won't report China as a stand-alone unit going forward, we assume the business should realize 2.4% comp and 7.9% unit growth rates on average over the next decade, with the entity reaching nearly $8.5 billion in revenue and just over 17,000 units by 2035 from $3.2 billion and 8,000 units in 2025, a bit shy of Starbucks’ 20,000 target. We assume a 4% royalty rate in our licensing estimates, including royalties paid to Starbucks, plus a modest 3% margin on product and equipment sales. As such, the higher-margin royalty mix should help international segment margin breach 20% in fiscal 2027, from its historical mid- to low-double-digit rate.

Ultimately, we hold a positive view of Starbucks’ broader long-term prospects, with around 3.7% comparable sales growth and 4.6% unit growth over our forecast period. We expect comparable sales growth to be fueled by continued investment in menu innovation across beverages and dayparts, customer service initiatives, advertising, and technology, including deeper loyalty engagement, which should support gains in both traffic and pricing. On the unit side, we see international, including China, leading growth with 6.6% annual expansion, outpacing the 1.7% we forecast for the more mature North American segment. By 2035, we project North America will operate around 21,500 stores (up from 18,311 in 2025), while international will top 42,500 (from 22,679).

In profitability, we see meaningful room for implied restaurant-level margin improvement as comparable sales and the broader industry backdrop recover from persistent traffic pressure. In North America (which we expect will represent nearly 60% of operating income in fiscal 2026), our implied unit-level margin estimate rises to 21.7% in 2035 from 11.7% in 2025, on moderating input cost inflation and technology initiatives aimed at saving labor hours and waste, such as AI inventory tracking and operating leverage. That said, we project modest upside beyond prepandemic levels (around 18%), given that traffic remains at a mid-teens rate below 2020 levels, and we expect the firm to continue investing in labor to maintain its competitive standing and support its brand positioning.

We assign Starbucks a wide economic moat rating, anchored by the strength of its intangible assets and cost advantage. Despite the restaurant industry’s low barriers to entry and minimal switching costs, Starbucks leads the global coffee and tea market with a 32% share, ahead of Dunkin (10%), Tim Hortons (6.1%), and Luckin (5.3%). Starbucks’ strong brand standing is evidenced by pricing power, attractive unit economics, successful international replication, and a formidable retail presence. As such, we posit that Starbucks has amplified the clout of its logo, which functions as a symbol of social currency that people carry on the go. Moreover, we believe that Starbucks’ scale enhances its procurement capabilities while allowing the firm to leverage marketing and technology investments across its sales base. Our view is corroborated by returns on invested capital, including goodwill, of 21% on average, which have outstripped our 8% weighted average cost of capital over the past decade. We expect the firm to continue to produce outsize economic returns over a 20-year horizon.

We posit that brand strength is evidenced by pricing power, reflected in comparable sales growth. In the US, Starbucks’ average check has grown about 4.5% annually over the last decade (ahead of roughly 4% aggregate inflation), while traffic has edged down only around 1% per year on average. We believe this underscores Starbucks’ ability to trade consumers into higher priced larger sizes and premium products, while keeping its offerings fresh with new flavors, formats, and food. In this context, Starbucks stands out with a markedly higher average transaction value than its peers, reinforcing its premium standing and indicating that consumers are willing to pay a higher price for the perceived value Starbucks offers. As such, Starbucks’ calendar 2025 US average transaction totaled $9.58, ahead of the US coffee and tea shop $7.06 average, including Dutch Bros ($8.81), Caribou ($7.37), Tim Hortons ($5.14), and Inspire Brands’ Dunkin’ ($4.84), according to Euromonitor and our estimates.

Its proven ability to increase average check size while holding customer traffic is also evidenced by superior unit economics that we expect to persist. Higher average unit volumes (AUVs) enable a firm to more effectively spread unit-level costs. With 2025 US average company-owned unit volumes reaching $2.2 million, Starbucks outpaces Dutch Bros (under $2.1 million), Dunkin’ US (around $1.3 million), and Tim Hortons ($1.3 million). When paired with implied midteens restaurant-level margins and assuming buildout costs around $1.3 million per new store, we estimate stout 35% cash-on-cash returns and a payback period of around 3-4 years on average, below the 4-6 year average in the quick-service restaurant space, based on existing company-owned store data, despite near-term margin softness.

Internationally, Starbucks proves its concept travels well, building global recognition while adapting to local tastes and preferences, which is far from easy. Starbucks counts over 22,000 international stores in more than 80 countries, exceeding its US footprint, averaging 7.5% growth annually over the last four years. This puts Starbucks behind only McDonald’s (31,500) and KFC (30,500), but ahead of coffee-peers like Dunkin’ (4,300), which operates in roughly 40 countries. The firm’s ability to resonate across cultures underscores brand clout, driving coffee habits in tea-first markets like China and holding its own in café-saturated markets like Italy.

Starbucks’ brand reach extends beyond the cafe to the retail aisle, reflecting consumers’ affinity for the brand. The firm holds the largest dollar share in the $20 billion US retail coffee market (fresh and instant coffee), with a 12.8% slice, besting Smucker’s Folgers (8.1%), Kraft Heinz’s Maxwell House (4.7%), Keurig Dr Pepper’s Green Mountain (3.3%), and Dunkin’ (2.9%). Starbucks’ leadership also extends to the $6.5 billion US ready-to-drink (RTD) coffee segment, with the firm chalking up a 37.5% share, ahead of Monster (13.6%), Stok (8.9%), and Dunkin’ (3%). Supporting its positioning, we view the firm’s 2018 Global Coffee Alliance distribution agreement with Nestle, the world’s largest packaged food company, as a driver of further international retail growth and brand awareness. We also see the firm benefiting from its 1994 bottling agreement with PepsiCo, helping it gain traction in securing premium retail shelf space. Additionally, both retail and RTD coffee show limited private-label penetration, at a low-single-digit share of the RTD category in the US and abroad, while the retail category ranges from high-single- to low-double-digit share. This lags the high-teens to low-20s share private label has amassed in the broader US food and beverage space, suggestive of the strong brands in the aisle.

Lastly, Starbucks’ comparatively low advertising expense as a percentage of revenue underscores the power of its brand. Over the past five years, the firm has spent an average of 1.5% of total revenue on advertising, and evidence suggests its licensing royalty related to advertising sits around 1% of total gross revenue. By contrast, Dunkin’ applies a 5% advertising fee on franchisees’ gross sales, while McDonald’s exceeds 4% and Restaurant Brands' ranges from 2%-5%.

We also believe Starbucks boasts a cost edge as the firm’s scale enables it to secure favorable pricing through volume discounts, achieve lower last-mile delivery costs, and spread technology and menu development investments across its sales base, which defends its footing against smaller peers, boosts value perception, and generates stronger operating profitability and returns on deployed capital.

Persistent menu development and daypart expansion should strengthen Starbucks’ value proposition and boost traffic.

Starbucks’ shift to a more personalized loyalty membership program, with richer rewards for higher-frequency guests, could support greater loyalty and more consistent traffic.

According to the National Coffee Association, US coffee consumption is at a 20-year high, while rising per capita coffee consumption trends in new markets should buoy continued growth despite intense competitive angst.

Cost pressures stemming from ongoing labor inflation, persistent unionization efforts, and contracting arabica supply may threaten further gross margin gains or volumes.

Intensifying competition from energy drinks could pressure Starbucks’ ready-to-drink sales.

Heightened spending on labor, advertising, and corporate restructuring threatens to hamper near-term margins.