Starbucks (SBUX.US) backs by Morgan Stanley before earnings: Current valuation does not fully reflect profit rebound, key to FY2027 lies in operating leverage and margin expansion

According to Zhitong Finance APP, Starbucks (SBUX.US) will announce its fiscal Q4 2026 earnings report on October 29. In a recently released research report, Morgan Stanley believes that Starbucks' Q4 revenue performance in the US market remains strong and maintains its forecast of 7% same-store sales growth. The firm raised its earnings per share (EPS) forecasts for Starbucks for Q4 and fiscal years 2026-2028, pointing out that operating leverage and room for margin expansion will be key to performance in fiscal 2027. The stock's recent pullback has increased its appeal, though market debate still exists. Before the earnings report, the firm maintains an "Overweight" rating on Starbucks, with a target price of $115. This target price represents about a 23% upside from Wednesday’s closing price of $93.25.

Morgan Stanley’s View

Morgan Stanley points out that there is still debate in the market regarding Starbucks' outlook. To a certain extent, the firm had already anticipated that the stock would remain range-bound before a sustained earnings recovery, which is still in its early stages. The firm believes this is more related to broader industry and consumer-level issues and may also reflect some slowdown in Starbucks’ growth toward the end of the current quarter, but does not see this as a risk to its forward-looking earnings forecasts.

Morgan Stanley states that Starbucks’ fiscal 2026 revenue exceeded expectations, and the stock had performed well until recently. Given these circumstances, the firm believes that looking ahead, the core of market debate remains largely unchanged— with large-scale labor investments entering the comparable base period, and cost-cutting plans ongoing, operating leverage and margin expansion will be key drivers for fiscal 2027. Commodity prices may pose some risk to this outlook, though coffee prices are moving in a favorable direction.

Earnings beats will be key to driving the share price higher, and Morgan Stanley believes this is achievable in the current environment. The firm expects fiscal 2027 guidance to set EPS at just over $3 (MS estimate: $3.18, consensus: $3.15), and to build towards a fiscal 2028 EPS target of $3.35-4.00.

With Starbucks' share price pulling back to what Morgan Stanley views as a more normal valuation multiple, the firm believes the current price does not fully reflect the earnings rebound that matches its own forecasts, nor the high end of the company’s target range.

Q4 Revenue: Maintaining 7% Same-Store Sales Growth in North America

For Q4 revenue, Morgan Stanley maintains its North America same-store sales growth forecast at 7%, slightly above market consensus. Based on the firm’s interpretation of third-party data and product launch cadence this quarter, this level is still supported—possibly even outperforming expectations—which could provide support for the share price.

This quarter featured several notable product launches, including the limited-time return of the Unicorn Frappuccino, which drove Starbucks to record the best weekend ever in sales at company-operated stores in North America; the autumn menu launched on August 25 marked the strongest autumn product release in the company’s history.

Morgan Stanley also raised its forecast for international same-store sales growth from 2% to 3%, noting that the number of stores covered in the international market is relatively limited for now.

In addition, Morgan Stanley has factored into its model Starbucks' announcement to close about 250 North American stores at the end of the quarter. Due to the timing, these closures will have little impact on Q4 sales, but the lower store count will be reflected in fiscal 2027 results.

This quarter’s performance appears strongest at the beginning, but MS believes recent trends still support Q1 fiscal 2027 same-store sales reaching or exceeding consensus, currently at 4.7%. Store closures will affect this figure—the benefit from last year’s closures will gradually fade, and a new round of closures may also have some impact.

Q4 Earnings: Raising EPS Forecast, Across-the-Board Upgrades for FY26/27/28

For Q4 earnings, Morgan Stanley raises its Q4 EPS forecast from $0.67 to $0.71, in line with market consensus, and upgrades FY26/FY27/FY28 EPS forecasts from $2.58/$3.07/$3.67 to $2.62/$3.18/$3.70 respectively.

With last year’s labor investments now in the comparable base period, operating leverage could provide further upside. Much of this adjustment reflects the clearer structural impact of international business joint ventures in Morgan Stanley’s model, while its view on North American margins remains largely unchanged.

Morgan Stanley adds that the roughly 250 North American stores closed in the last week of September have been factored into fiscal 2027 store count and revenue forecasts, including the offsetting effects of some sales transfers. As the closures occurred near quarter-end, there is little impact on fiscal Q4 2026 results.

Morgan Stanley is also rolling forward its valuation basis to calendar year 2028, but is now using a lower multiple (reduced from 35x to 30x), keeping its price target at $115 unchanged. The firm expects this multiple to trend lower as Starbucks realizes healthier margin levels and more normalized growth rates.

If investors are bullish, 2028 could still be a year in which Starbucks' earnings potential has not been fully released, though performance should be closer to potential levels. Morgan Stanley agrees with the view that, at this stage, share price upside will mainly come from earnings outperformance.

On Fiscal 2027 Guidance

Fiscal 2027 same-store sales guidance is likely to start above 3%, but Morgan Stanley thinks the initial stage may see higher performance, and Starbucks is likely to guide accordingly. The firm believes that for the stock to perform well next year, actual results need to beat this level. This still means future growth could slow compared with current trends. The firm now expects North America same-store sales growth of 4.4% in fiscal 2027, slightly above the consensus of 4%.

Key drivers for fiscal 2027 include store renovations, continued optimization of service/technology/marketing, possible further improvements in the food business, and potentially moderate price increases.

International performance may be slightly lower. Year to date, international same-store sales growth is about 4%, compared to 6% in North America. Morgan Stanley expects part of this gap will persist in fiscal 2027, forecasting international same-store sales growth of 3.4%, slightly above consensus at 3.1%.

With sales recovery now more solidified, Morgan Stanley believes that debate over fiscal 2027 will shift more towards margin transmission, as the largest investments are now in the base period. The firm expects fiscal 2027 EPS of $3.18, above the consensus of $3.15, and thinks the company could guide for EPS of about $2.90–3.30, serving as a transition from this year’s $2.55–2.65 (which has already been revised higher during the year) towards the fiscal 2028 target of $3.35–4.00.

Margin expansion should be supported by: operating leverage from sales growth, continued $2 billion cost savings plan, Green Apron Service investments entering the comparable base period, and lower coffee prices. However, ongoing reinvestment in employees will partially offset these positives.

In terms of store count, Morgan Stanley expects that after closing about 250 North American stores at the end of fiscal Q4 2026, store development will pick up, with overall store system growth rising from about 1% in fiscal 2026 (as estimated by the firm) to about 3% in fiscal 2027, and gradually approaching around 5% in later forecast years.

It is unlikely that the US market will begin to accelerate expansion before fiscal 2028 (and there is still debate as to whether such expansion can reach significant scale). Both the US and overseas markets saw closures in fiscal 2026, so the scale of store closures in fiscal 2027 should decrease.