Starbucks (SBUX.US) receives post-earnings target price upgrade to $107 by Citi: Growth logic shifts to margin expansion, but high valuation still requires performance support

According to Wisdom Finance APP, Starbucks (SBUX.US) released its fiscal Q4 2026 earnings report after the US market closed on Thursday, October 29. The report shows that Starbucks’ Q4 revenue was $9.14 billion, down about 4% year over year and below the market expectation of $9.22 billion, mainly due to the exclusion of Chinese retail business revenues after the shift to a joint venture licensing model with Boyu Capital. On the profitability side, net profit reached $677 million, surging more than fourfold year over year, partly reflecting a decrease in restructuring and impairment expenses; adjusted earnings per share were $0.80, up 54% year over year and exceeding analysts’ expectations of $0.72.

Global same-store sales grew by 7.2%, marking the fifth consecutive quarter of positive growth and beating the market expectation of around 6%. In particular, US same-store sales grew 7.7%, surpassing expectations thanks to store renovations and strong performance from the coffee chain’s autumn menu items. North America saw 7.9% growth, while the international market increased by only 0.9%, below the expected 3.2%, as transaction volume declines offset the growth in average ticket size.

Through store upgrades, service improvements, menu updates, and more targeted marketing, Starbucks has attracted more customers. Meanwhile, the company closed hundreds of underperforming stores to focus resources on stronger locations. In September, about 250 stores were closed in North America.

Citi pointed out in its latest research report that the investment logic for Starbucks appears to be shifting. Previously, the company was driven by above-expectation same-store sales growth (6.2% in fiscal 2026, significantly above its long-term target range upper limit of 3%+), but now is transitioning toward slower same-store sales growth (4% targeted for fiscal 2027, with more growth coming from higher ticket sizes rather than traffic) along with more sustained and stable margin expansion.

Against a backdrop of continued challenges in the global consumption environment, Citi believes investors will still be willing to pay premium valuations for brands capable of delivering low-to-mid-single-digit (LSD-MSD%) same-store sales growth, margin expansion, and strong double-digit EPS growth. However, Citi expects that slowing revenue growth will remain a focal point in market valuation discussions.

Considering that Starbucks’ current share price corresponds to roughly 32 times Citi’s EPS forecast for calendar 2027, the bank believes that to maintain this high valuation, Starbucks needs to deliver more positive surprises in its fundamentals, especially in same-store sales growth.

Citi also added key points from follow-up discussions:

(1) Slowing the pace of US store expansion. Recently there have been some signs that Starbucks will adopt a more cautious stance on new store openings, with the expansion curve flattening. The company currently expects about 300 net new stores in North America in fiscal 2028, below the target of 400 self-operated stores presented to investors previously. However, the slower expansion may have a modest positive impact on margins and same-store sales growth, including reducing the performance drag from opening new stores, lowering capital expenditures, and less cannibalization of traffic between stores.

(2) Accelerating store renovations. Starbucks completed 1,700 store renovations in fiscal 2026, exceeding its previous goal of 1,500; its target for fiscal 2027 is over 2,000 stores. Starbucks noted that renovations could boost sales and transaction volumes across different business hours and touchpoints, but did not quantify the specific increase. This may be one reason the company is confident in achieving 4%+ same-store sales growth next year.

(3) No new progress on the potential franchising of business in Japan. Management is satisfied with the business performance in Japan for fiscal 2026, although same-store sales there may post negative growth in fiscal Q4 2026. Over the long term, however, the company hopes to adopt an asset-light model outside the US market.

(4) Store closures and business shifts contributed about 200 basis points to US same-store sales growth. Store closures and business shifts contributed about 200 basis points to US same-store sales growth; pricing and delivery business contributed 260 basis points to the growth in average ticket size; and additional purchases and product mix changes contributed another 260 basis points. For fiscal 2027, Starbucks expects the 4% same-store sales growth target to be primarily driven by higher average ticket sizes, including some benefit from price increases (which are currently still below the rate of inflation).

(5) First stock repurchase restart since the beginning of fiscal 2024. Starbucks will restart its stock buyback program for the first time since fiscal 2024 and commits to repurchasing about $1 billion in shares in fiscal 2027.

Citi has adjusted its EPS estimates for Starbucks for fiscal 2027 and 2028 to $3.20 and $3.55 from $3.15 and $3.60, respectively, due to recent better-than-expected same-store sales performance. The bank maintains a "Neutral" rating on Starbucks and raises its target price from $104 to $107. This target price is based on the next 12 months’ EBITDA projections and a 19x multiple (about 1.4x the market average, previously 1.3x). The multiple was raised as the company confirmed the return of operating leverage.