Starbucks: Turnaround Brewing?

"Margin Squeeze And At What Price I Would Buy"

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Most investors are familiar with Starbucks (SBUX), and if you’ve been a shareholder, you’re also familiar with the headwinds the company has faced in recent years. Especially, those related to inflation.

I was a long-time shareholder myself, but ultimately sold off my shares when I repositioned my portfolio earlier this year.

While Starbucks remains a high-quality business, I believe the company’s turnaround efforts will continue to be weighed down for the foreseeable future.

And despite slight improvements in the most recent quarter, the stock still trades at a premium that I don’t believe is justified until margins improve meaningfully.

Current Price: $86.91

Portfolio Purpose: Income 💰

Mixed Quarter, but Encouraging Signs ↕️

Starbucks reported fiscal Q4 earnings at the end of October:

    •    EPS: Increased $0.02 sequentially but missed estimates by $0.03

    •    Revenue: $9.6 billion (+$250M above expectations)

    •    YoY Revenue Growth: 5%

    •    Primary Growth Driver: International store openings, especially China

Starbucks opened 316 new stores in China during the quarter. In the U.S., management focused on “Back to Starbucks,” an optimization plan centered on store closings, remodels, and uplift initiatives.

    •    70 store uplifts completed for FY25

    •    Targeting 1,000+ uplifts in FY26

    •    107 stores closed globally in Q4

For the first time in roughly 18 months, global comparable store sales turned positive, rising about 1%.

China led the improvement:

    •    +2% comp-store sales

    •    +9% transactions

    •    +1% average ticket

U.S. rewards membership also saw a slight bump, increasing to 34.2 million from 34 million.

Margins Remain Under Pressure 💣

Operating margins were 9.4%, down a sharp 500 basis points year-over-year.

Management attributes the decline to:

    •    Persistent inflation

    •    Higher coffee input costs

    •    Tariffs

    •    Investments tied to the turnaround plan

For context, pre-COVID margins were 20.2%, underscoring how far profitability has fallen.

Potential tailwinds:

    •    Tariff relief on coffee

    •    Lower base interest rates

However, even with these, I don’t foresee Starbucks returning to pre-pandemic margin levels for several years. So, upside is limited near- and medium-term

Dividend Safety: A Cautious Outlook ⚠️

Starbucks raised its dividend by just $0.01, bringing it to $0.62 per share. This is a notable decline from historical $0.04–$0.05 hikes and I think reflects current financial pressures.

What’s behind the slowdown?

    •    Cash from operations fell from $6.1B → $4.7B

    •    Free cash flow dropped to $2.4B

    •    Dividends paid totaled $2.8B

    •    Payout ratio exceeds 100% ‼️

    •    Share buybacks paused (vs. 12.8M repurchased last year)

Management does expect CAPEX to decline next year, which should help free up some cash. I believe the dividend remains safe for now, but investors should likely expect penny-per-year raises at best.

If the economy enters a recession, Starbucks may have to:

    •    Pause dividend growth, or

    •    In a worst-case scenario, implement a small dividend cut

Balance Sheet: Flexible, but Not a Cure-All ⚖️

Starbucks has:

    •    $3 billion revolver capacity

    •    No current revolver borrowings

    •    ~$14.6 billion total debt

The revolver provides short-term flexibility, but relying on it to fund dividends is not ideal for long-term income investors as it is not a sustainable way to continue paying shareholders.

Valuation & Risks ⚠️

At over 30x earnings, Starbucks trades at a premium despite the declining profitability. For a company in a turnaround, that’s a stretch in my opinion.

And competitive pressures are also intensifying:

    •    Dutch Bros (BROS)

    •    Luckin Coffee (LKNCY)

    •    Black Rock Coffee Bar (BRCB)

….Plus more competitors are expected to go public in the coming years.

If Starbucks can return to double-digit growth, shares could eventually return to $100 or more.

My Buy-Again Price Target: 💲

Around or below $70 per share

If margins weaken in 2026, a pullback to this range would not surprise me.

For now, I expect SBUX to trade sideways between $85 and $95.

Bottom Line ✅

Starbucks is still a strong global brand with durable long-term potential. Management’s focus on store optimization and the customer experience is a step in the right direction.

But today’s reality is clear:

    •    Margins remain far below historical levels

    •    Cash flows have weakened

    •    Dividend growth has slowed to a crawl

    •    The stock trades at a premium multiple

Until sequential margin improvements appear and free cash flow recovers, I think it’s best to sit on the sidelines and wait.

If shares fall into the $70 range, I would consider re-building a position. Until then, I expect muted returns and limited upside. ☕

What do you think?

Happy Investing!

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This is not financial advice. This is for educational purposes only. Please do your own due diligence.

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