Jefferies reiterates Underperform rating on Starbucks stock, citing $1 billion restructuring cost

Starbucks is undertaking a $1 billion restructuring plan to close approximately 500 North American company-owned stores and eliminate 900 non-retail jobs by FY25, prompting Jefferies to maintain an Underperform rating due to underappreciated challenges and low visibility for material same-store sales or margin benefits. Concurrently, global investment firms, including Carlyle and EQT, are preparing final offers for a controlling stake in Starbucks' China operations, with valuations reaching up to $5 billion.

Analysis

Starbucks (SBUX) is navigating a period of significant strategic realignment, characterized by both operational challenges in its core market and potential value-unlocking M&A activity abroad. The company is initiating a $1 billion restructuring in North America, which includes the closure of approximately 500 company-owned stores and the elimination of 900 non-retail jobs by fiscal year 2025. This move, which is projected to cause a 1% decline in North American company-owned units, has been met with skepticism from analysts at Jefferies, who maintain an "Underperform" rating. Jefferies highlights that the market may be underappreciating the near-term headwinds and cites "low visibility" on whether the costly restructuring will yield material improvements in same-store sales or margins. This perspective is reinforced by the stock's relatively high P/E ratio of 36.2x. In contrast to the operational concerns in North America, Starbucks' China business has attracted strong interest from top-tier private equity firms, including Carlyle Group and EQT, who are preparing bids for a controlling stake. These bids reportedly value the China operations at up to $5 billion, or approximately 10 times its expected 2025 EBITDA, signaling robust confidence in that segment's growth trajectory. This creates a dual narrative for investors: a challenging and costly turnaround in the mature U.S. market versus a high-value strategic monetization opportunity in China.

Key Decisions for Investors

• Investors should closely monitor same-store sales growth and operating margin trends in the North American market over the coming quarters to validate the efficacy of the $1 billion restructuring plan.
• Consider the potential for a significant value-unlocking catalyst from the sale of a controlling stake in the China operations, as a transaction near the reported 10x EBITDA multiple could provide substantial capital and lead to a re-rating of the stock.
• Given the stock's high 36.2x P/E ratio and conflicting analyst views, it is prudent to weigh the execution risks of the North American turnaround against the potential M&A upside before altering a position in SBUX.