Starbucks downgraded at Wolfe Research as execution risk remains high

Investing.com — Wolfe Research downgraded Starbucks to Peer Perform from Outperform in a note on Monday, warning that the company is only at the “early stages of a multi-year turnaround” and that execution risk remains high. 

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Analyst Margaret-May Binshtok wrote that “the beans are just hitting the grinder in a multi-year turnaround,” noting that while there are “green shoots emerging,” 

Wolfe wants “to see evidence of sustained execution, especially amid an increasingly competitive coffee landscape.”

Binshtok said Starbucks’ 2028 comp target of 3 percent or more “could be reasonable” given new growth levers and a softened baseline following years of traffic and share loss. 

But she cautioned that “an intensifying competitive landscape, driven by high-growth smaller peers gaining share, could cap the comp recovery and constrain pricing power, even with multiple levers in play.” 

Wolfe’s proprietary traffic analysis found some evidence of traffic deterioration when high-growth rivals such as Dutch Bros and 7 Brew opened nearby.

Margins are another pressure point. Investments tied to Starbucks’ “Back to Starbucks” plan, particularly incremental labor spending, “put pressure on margins in the near term” and are likely to leave profitability “structurally below peak F’2019 levels,” the note said.

Given those headwinds, Wolfe wrote, “we question whether the premium valuation is warranted,” arguing that much of the turnaround upside is already baked into the multiple. 

The firm said it is “looking for signs of a sustainable turnaround,” but for now sees the risk-reward as fairly balanced.