Starbucks Corporation (SBUX.US) receives a Citi target price hike to US$107 after earnings: growth logic shifts toward margin expansion, but high valuation still needs earnings support.

Starbucks Corporation (SBUX.US) released its fiscal 2026 fourth-quarter earnings after the U.S. market close on Thursday, October 29. The report showed that Starbucks Corporation's Q4 revenue was US$9.14 billion, down about 4% year over year, below the market expectation of US$9.22 billion. The decline mainly stemmed from the China retail business no longer being consolidated after it shifted to a licensed joint-venture model with Boyu Capital. Profitability was strong: net income was US$677 million, up more than 4-fold year over year, partly reflecting lower restructuring and impairment charges; adjusted earnings per share were US$0.80, up 54% year over year, above analysts' expectation of US$0.72. Global same-store sales grew 7.2%, the fifth consecutive quarter of positive growth, above the market expectation of about 6%. U.S. same-store sales rose 7.7%, beating expectations, helped by store renovations and strong performance of the coffee chain's fall menu products. North America grew 7.9%; international markets grew only 0.9%, below the expected 3.2%, as lower transaction volume offset higher average ticket. Through store upgrades, service improvements, menu updates and more targeted marketing, Starbucks Corporation attracted more customers. At the same time, the company also closed hundreds of underperforming stores in order to focus on better-performing locations. In September, about 250 stores in North America were closed. Citi noted in its latest research report that Starbucks Corporation's investment logic appears to be shifting. Previously, the company relied on better-than-expected same-store sales growth (fiscal 2026 same-store sales growth of 6.2%, significantly exceeding the upper end of its multi-year target range of 3% or more); now it is gradually shifting toward slower same-store sales growth (fiscal 2027 target of 4%, with growth driven more by average ticket than traffic) and more sustained and stable margin expansion. Against the backdrop of a still-challenging global consumer environment, Citi believes investors will still be willing to pay a valuation premium for brands that can achieve low-single-digit to mid-single-digit (LSD-MSD%) same-store sales growth, margin expansion and high-teens percentage EPS growth. However, the bank expects slower revenue growth to remain a focus of market valuation discussions. Considering that Starbucks Corporation's stock currently trades at about 32x Citi's calendar 2027 EPS forecast, the bank believes that to sustain the current high valuation, Starbucks Corporation needs to deliver greater fundamental upside, especially in same-store sales growth. Citi also added key takeaways from subsequent discussions: (1) Slower U.S. store expansion. There have recently been some signs that Starbucks Corporation will adopt a more prudent strategy on new store openings, and the store expansion curve is slowing. The company now expects about 300 net new stores in North America in fiscal 2028, below the previous target of 400 company-operated stores presented at its investor day. However, slower store expansion may have a modest positive impact on margins and same-store sales growth, including reducing the drag from new store openings, lowering capital expenditure and reducing customer cannibalization between stores. (2) Faster store renovation pace. Starbucks Corporation completed renovations at 1,700 stores in fiscal 2026, exceeding its previous target of 1,500; its fiscal 2027 renovation target is more than 2,000. Starbucks Corporation said store renovations can drive sales and transaction growth across different dayparts and customer touchpoints, but the company did not quantify the specific increase. This may be one reason the company is confident in achieving same-store sales growth of 4% or more in the coming year. (3) No new progress on a potential franchise transfer of the Japan business. Management is satisfied with the fiscal 2026 performance of the Japan business, even though same-store sales in the Japan market may have posted negative growth in the fourth quarter of fiscal 2026. However, over the long term, the company wants to adopt an asset-light operating model in markets outside the United States. (4) Store closures and business transfers contributed about 200 basis points to U.S. same-store sales growth. Store closures and business transfers contributed about 200 basis points to U.S. same-store sales growth; pricing and delivery contributed 260 basis points to average ticket growth; add-on purchases and product mix changes contributed a further 260 basis points. For fiscal 2027, Starbucks Corporation expects its 4% same-store sales growth target to be driven more by higher average ticket, including some benefit from price increases (price increases are currently still below the inflation rate). (5) Restarting share buybacks for the first time since fiscal 2024. Starbucks Corporation will restart its share repurchase program for the first time since fiscal 2024 and has committed to repurchasing about US$1 billion of stock in fiscal 2027. Citi adjusted its EPS forecasts for Starbucks Corporation for fiscal 2027 and fiscal 2028 to US$3.20 and US$3.55, respectively, from US$3.15 and US$3.60, due to recent better-than-expected same-store sales performance. The bank rates Starbucks Corporation "Neutral" and raised its target price to US$107 from US$104. The target price is based on the next 12 months' EBITDA forecast, i.e., 12 months from now, using a 19x valuation multiple (about 1.4x the market average, previously 1.3x). The bank raised the corresponding valuation multiple amid the company's confirmation that operating leverage is returning.