Wolfe Research Downgrades Starbucks Rating, Citing Continued High Execution Risk

Investing.com - Wolfe Research downgraded Starbucks from Outperform to Market Perform in a Monday report, warning that the company is still in the early stages of a multi-year transformation with high execution risks.

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Analyst Margaret-May Binshtok wrote, “The coffee beans have just entered the grinder; this is a multi-year transformation,” noting that while “new growth is emerging,” Wolfe wants “to see continued evidence of execution, especially in an increasingly competitive coffee market.”

Binshtok stated that, given new growth levers and a lower base after years of customer traffic and market share declines, a 3% or higher same-store sales growth target for 2028 “may be reasonable.”

However, she warned that “the competitive landscape is intensifying, with high-growth small competitors capturing market share, which could limit same-store sales recovery and constrain pricing power, even with multiple growth levers at play.”

Wolfe’s proprietary foot traffic analysis found some evidence of traffic deterioration when high-growth competitors like Dutch Bros and 7 Brew open nearby.

Profit margins are another pressure point. The report states that investments related to Starbucks’ “Return to Starbucks” plan, especially incremental labor costs, “are putting short-term pressure on profit margins” and could cause profitability to be “structurally below the peak levels of fiscal 2019.”

Given these headwinds, Wolfe wrote, “we question whether its premium valuation is justified,” believing that the upside from the transformation has largely been reflected in valuation multiples.

The firm said it is “looking for signs of a sustainable transformation” but currently considers the risk-reward to be relatively balanced.

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