Starbucks' Store Closures Signal Costly Turnaround Amid Persistent Overvaluation

What happened

Starbucks is navigating its 'Back to Starbucks' turnaround, with FY25 revenue growing 3% to $37.2B but operating margin collapsing from 15.0% to 7.9% due to $892M in restructuring charges and labor investments. DeepValue reports a halving of EPS to $1.63, while the stock trades at a lofty 54x trailing P/E and 23x EV/EBITDA, with a DCF suggesting over 200% overvaluation relative to an intrinsic value near $29. A Seeking Alpha article indicates the company is entering the third stage of this reset, closing underperforming stores and potentially divesting its China business to cut costs, but margins remain at historical lows. This aggressive pruning comes with significant financial strain, including elevated net debt/EBITDA of 4.35x and negative equity, underscoring balance sheet vulnerabilities. Despite a modest +1% global comp in Q4 FY25, the turnaround is early and unproven, with store closures unlikely to quickly restore mid-teens margins or justify the current premium.

Implication

The ongoing margin compression and high leverage mean that store rationalization, though aimed at improving unit economics, will likely incur further restructuring costs, delaying earnings recovery. Divesting the China business could generate cash but risks losing a key growth market, adding strategic uncertainty. With the stock priced for a swift rebound, any stumble in comps or margin improvement could trigger a sharp decline, as the DCF model indicates substantial downside. Monitoring quarterly trends in global comps and operating margins is crucial, but the current valuation offers no margin of safety. Thus, the risk-reward remains skewed negatively, reinforcing a cautious stance.

Thesis delta

The new article corroborates the DeepValue report's view that Starbucks' turnaround is costly and prolonged, with store closures highlighting operational inefficiencies rather than a quick fix. It does not change the core thesis of overvaluation and financial deterioration; if anything, it underscores the challenges in restoring margins amid high expenses. Therefore, no shift in the STRONG SELL recommendation is justified, as fundamental risks persist.