Starbucks Corporation (SBUX.US) Gets Morgan Stanley's Backing Ahead of Earnings: Current Valuation Does Not Fully Reflect Earnings Rebound; Fiscal 2027 Key Will Be Operating Leverage and Margin Expansion

Starbucks Corporation (SBUX.US) will report its fiscal 2026 fourth-quarter earnings on October 29. In a research note released recently, Morgan Stanley said that Starbucks Corporation's U.S. market revenue performance in Q4 remains solid and maintained its forecast of 7% same-store sales growth. The bank raised its EPS forecasts for Starbucks Corporation's Q4 and fiscal years 2026-2028, and noted that operating leverage and margin upside will be key to fiscal 2027 results. After the stock's recent pullback, its attractiveness has improved somewhat, though the market still has differing views. Ahead of the earnings release, the bank maintained its "Overweight" rating on Starbucks Corporation with a price target of $115. That target implies about 23% upside from the stock's Wednesday closing price of $93.25. Morgan Stanley's View Morgan Stanley pointed out that market views on Starbucks Corporation remain divided. To some extent, the bank had previously expected the stock to remain range-bound before an earnings recovery, and that recovery is still in its early stages. The bank believes this is more related to issues at the industry and consumer levels, and may also reflect some slowdown in Starbucks Corporation's growth toward the end of the quarter, but it does not see this as a risk to its forward earnings forecasts. Morgan Stanley said Starbucks Corporation's fiscal 2026 revenue performance exceeded market expectations, and until recently the stock had been performing well. Given these circumstances, the bank believes there is not much new in the core market debate going forwardas large-scale labor investments enter the comparison base while cost-cutting plans continue to advance, the key to fiscal 2027 will be operating leverage and margin upside. Commodity prices could pose some risk to this expectation, though coffee prices are moving in a favorable direction. An earnings beat will be key to driving the stock higher, and Morgan Stanley believes this is achievable in the current situation. The bank expects fiscal 2027 guidance to position EPS in the low $3 range (Morgan Stanley forecasts $3.18, consensus $3.15), and on that basis, to gradually move toward a fiscal 2028 EPS target of $3.35$4.00. As Starbucks Corporation's stock has pulled back to valuation multiples that Morgan Stanley considers more normal, the bank believes the current share price does not fully reflect the earnings rebound consistent with its own earnings forecasts, nor does it reflect the high end of the company's target range. Q4 Revenue: Maintaining 7% North America Same-Store Sales Growth For Q4 revenue performance, Morgan Stanley maintained its forecast of 7% same-store sales growth in North America, slightly above consensus. Based on the bank's interpretation of third-party data and the quarter's product launch cadence, this forecast remains supportedand may even be slightly better than expectedwhich could provide support for the stock. The quarter included several notable new product launches, among them the limited-time return of the Unicorn Frappuccino, which drove Starbucks Corporation's best-ever weekend for company-operated store sales in North America; and the fall menu launched on August 25, which became the company's strongest fall product launch in history. Morgan Stanley raised its international same-store sales growth forecast to 3% from 2% previously; international currently covers a relatively limited number of stores. In addition, Morgan Stanley incorporated into its model Starbucks Corporation's announcement near the end of the quarter that it would close about 250 North American stores. Given the timing, these closures will have essentially no impact on Q4 sales, while the lower store count will be reflected in fiscal 2027 results. Performance in the quarter appears to have been strongest at the outset, though Morgan Stanley believes recent trends still support fiscal 2027 Q1 same-store sales at or above consensus, currently at 4.7%. Store closures will have an impact herethe benefit from last year's closures will gradually fade, and the new round of closures may also have some effect. Q4 Earnings: Raising EPS Forecasts, Higher Across FY26/27/28 For Q4 earnings performance, Morgan Stanley raised its Q4 EPS forecast to $0.71 from $0.67 previously, in line with consensus; at the same time, it raised its FY26/FY27/FY28 EPS forecasts to $2.62/$3.18/$3.70 from $2.58/$3.07/$3.67, respectively. As last year's labor investments enter the comparison base, operating leverage could provide some upside. Most of the forecast revisions reflect international joint-venture structural changes being more fully reflected in the bank's model, while its view on North America margins is largely unchanged. Morgan Stanley added that the roughly 250 North American stores closed in the last week of September have been incorporated into its fiscal 2027 store count and revenue forecasts, including the offsetting effect from some sales transfer. But because these closures occurred at the end of the quarter, they have essentially no impact on fiscal 2026 Q4. Morgan Stanley also rolled its valuation base forward to calendar 2028, though it now uses a lower multiple, cutting it to 30x from 35x previously, with the final price target still unchanged at $115. The bank believes this multiple will trend lower as Starbucks Corporation gradually achieves healthier margin levels and more normalized growth. If investors take a bullish view, 2028 may still be a year in which earnings potential is not fully realized, but performance should be closer to underlying levels. The bank agrees with the view that at this stage, upside for the stock will mainly come from earnings beats. Views on Fiscal 2027 Guidance Fiscal 2027 same-store sales guidance will likely start at a level above 3%, though Morgan Stanley believes performance early in fiscal 2027 could be above that level, and Starbucks Corporation will likely guide accordingly, and the bank believes actual results need to be better than that for the stock to perform well next year. This still implies that future growth can slow somewhat from current trends. The bank currently expects fiscal 2027 North America same-store sales growth of 4.4%, slightly above consensus of 4%. Key drivers for fiscal 2027 include store renovations, continued optimization of service/technology/marketing, possible further improvement in the food business, and possible modest price increases. International performance may be somewhat lower. Year to date, international same-store sales growth is about 4%, versus 6% in North America. Morgan Stanley expects part of this gap to persist in fiscal 2027, and therefore forecasts fiscal 2027 international same-store sales growth of 3.4%, slightly above consensus of 3.1%. With the sales recovery now more solid, Morgan Stanley believes the bigger debate for fiscal 2027 will shift to margin flow-through, since the largest investments have entered the comparison base. The bank forecasts fiscal 2027 EPS of $3.18, above consensus of $3.15. It believes the company could provide EPS guidance of about $2.90$3.30, which would serve as a transition from this year's $2.55$2.65 (a figure that has been gradually raised over the course of the year) toward the fiscal 2028 target of $3.35$4.00. Margin expansion should be driven by the following factors: operating leverage from sales growth, the ongoing $2 billion cost-savings plan, the Green Apron Service investment entering the comparison base, and lower coffee prices. However, continued reinvestment in employees will partially offset these benefits. On store count, Morgan Stanley expects store development to gradually accelerate after the closure of about 250 North American stores at the end of fiscal 2026 Q4, with system-wide store growth rising from about 1% in fiscal 2026, as estimated by the bank, to about 3% in fiscal 2027, and gradually moving toward around 5% in later years of the forecast period. The U.S. market is unlikely to begin accelerating expansion before fiscal 2028 (and whether such expansion can reach a meaningful scale remains debatable), but since store closures occurred in both the U.S. and overseas markets during fiscal 2026, the scale of closures in fiscal 2027 should be somewhat reduced.