Starbucks' Store Reset Confirms Turnaround Efforts, Yet Valuation and Leverage Concerns Loom Large

What happened

Starbucks is closing underperforming cafes to concentrate sales in stronger stores, aiming to enhance margins and unit-level profitability as part of its 'Back to Starbucks' turnaround strategy. This move follows significant operational challenges, with the DeepValue report noting a halving of operating margin to 7.9% in FY25 due to restructuring charges and labor investments. While Q4 FY25 showed early traction with +1% global comps, the first positive quarter in seven, the recovery remains fragile and unproven. The company's financial health is strained, with net debt/EBITDA elevated at 4.35x and negative equity, increasing downside risk if the turnaround stalls. Despite these efforts, the stock trades at a rich 54x trailing earnings, implying over 200% overvaluation relative to intrinsic value, highlighting persistent investor optimism that may be misplaced.

Implication

The store portfolio reset may improve unit economics over time, but it follows heavy restructuring costs that have already slashed earnings and margins, demanding proof of durable recovery. Margin expansion back to mid-teens levels is critical to justify the premium valuation, yet this hinges on successful execution amid intense competition and labor unrest. High leverage amplifies financial risk, leaving little room for error if comps falter or macro conditions worsen. Valuation metrics signal extreme overpricing, with a DCF-based intrinsic value near $29 versus a current price around $88, suggesting limited margin of safety. Monitoring quarterly comps trends and labor relations is essential; any setbacks could accelerate downside, reinforcing the bearish case.

Thesis delta

The news confirms Starbucks' ongoing store rationalization as part of its turnaround strategy, but it does not alter the core STRONG SELL thesis. Key concerns—overvaluation, high leverage, and unproven margin recovery—remain unchanged, requiring more evidence of sustained improvement. Investors should view this as a continuation of existing efforts rather than a catalyst for re-rating, maintaining a negative stance until fundamentals solidify.