Starbucks Comps Surge, But Margin Squeeze and Valuation Keep Us on the Sidelines

What happened

Starbucks' Q2 FY2026 results showed a strong comparable sales increase of 7.1% in North America, driven by a 4.4% transaction gain. However, the company disclosed that the comp was 'primarily due to higher delivery sales,' raising questions about the durability of in-store traffic recovery. North America operating margin fell to 10.0% from 11.6% as labor investments (~260 bps) and other costs more than offset sales leverage. The company completed its China JV transaction, which will reduce reported revenue but mechanically improve margins, and plans to use proceeds for debt reduction. Despite the positive sales momentum, the stock trades at 26.2x EV/EBITDA with net leverage of 4.3x, leaving limited room for error if transaction growth slows or margins fail to inflect.

Implication

Investors should remain on the sidelines. The strong comparable sales are encouraging, but the margin compression and reliance on delivery for traffic growth introduce fragility. The China restructuring adds complexity to earnings comparability. A better entry point would be around $85, or after Q3/Q4 FY26 reports confirm that North America operating margin is recovering above 11% and transaction growth is broad-based. Until then, the risk/reward is unattractive given the elevated valuation and leverage.

Thesis delta

The initial thesis that Starbucks' turnaround would drive both top-line recovery and margin expansion is now nuanced. While sales have rebounded, margins continue to contract due to labor investment costs, and the sales mix shift toward delivery may limit profit conversion. The stock's current price already prices in a successful turnaround, but the path to sustainable margin recovery is not yet confirmed, shifting focus to execution risk and cost control.