Starbucks Corp

Starbucks has a long profit record, but the price sits far above our value range, so the case for buying is hard to make.

Starbucks roasts coffee, runs company-operated stores and licenses its brand to partners who run others, so most of its revenue comes from its own stores. Our tests found no loss years across the filings, which is a real strength. Operating margin averaged 15% but fell to 7.9% in fiscal 2025, and the annual report puts part of that fall down to restructuring costs from closing coffeehouses. Our base value is $19.64 per share against a price of $97.52, and all three of our value estimates sit well below that price, so the margin of safety test fails. Our tests read the situation as hard to predict, because the earnings base has moved sharply and the value range is therefore wide, and we have set the research status on that basis.

Starbucks roasts coffee and sells drinks and food through company-operated stores, which make up most of its revenue. It also licenses its brand to partners who run stores, and it sells them coffee, equipment and other products. Licensees pay a margin on products and a royalty on retail sales, and they carry the store operating costs and capital spending. Packaged coffee and ready-to-drink products sold through Channel Development add a further stream.

• Company-operated store sales, the largest share of revenue
• Royalties and product sales to licensed stores
• Channel Development packaged coffee and ready-to-drink products, including the Global Coffee Alliance with Nestlé
• Store count growth and comparable store sales
• Coffee and dairy input costs, which set gross margin

Inside the circle? Revenue has grown over 15 years of filings and no year was a loss, which is a real strength. But operating margin averaged 15% and fell to 7.9% in the latest year, partly from restructuring, so the earnings base has moved sharply. Coffee prices, tariffs and a strategic reset still under way make it hard for a careful owner to estimate the economics ten years out with confidence.

The main protection is the Starbucks brand and the trademarks behind it. The filing describes the brand as recognised throughout most of the world, and the store network and licensee partners extend that reach. Returns on capital have been high, with a return on invested capital of 48% in the latest year, but the latest year also shows the moat under strain. Operating margin fell to 7.9% as restructuring, deleverage and labour costs hit profit, and comparable transactions fell. We rate the protection as narrow: the brand is strong, but the filing gives little proof that Starbucks can raise prices without losing customers. Over ten years the economics are hard to estimate with confidence, so the durability is unclear. At $97.52 the share price sits well above the base value of $19.64, which is a separate question from the moat itself.

Management has returned cash mainly through dividends, which have averaged a payout of 78% of earnings. The share count has fallen at -2.9% a year on average, but the filing says no shares were bought back in the latest fiscal year, so that fall reflects earlier purchases. Total debt stands at $16.1B, and the filing says management may borrow more to fund capital programmes and shareholder returns, which runs against a Buffett-style preference for little debt. The filing is open about the fall in margin and names its causes, but its tone on the reset is more hopeful than the figures so far support. We cannot judge whether the store closures and restructuring will earn their cost, because the excerpts give no return target for them.

• Dividends have averaged a payout of 78% of earnings, which leaves little of each year's profit to retain for growth.
• The retained earnings test reads 3.2×, but that rests on earlier years, and the latest owner earnings are $1.5B.
• Debt payback is 6.8 yrs and interest cover is 5.4×, both in the mixed range set by the little-debt test.
• Capital spending has averaged 1.3× depreciation, so the business still needs steady reinvestment to keep its stores up to standard.

• FailsMargin of safetyFails

  At $97.52, the price is above the base-case value of $19.64 (the bear case is $7.18), so there is no margin of safety (-396%). The standard lens asks for 25%.

  Why this test
• FailsInterest rates are gravityFails

  The owner-earnings yield is 2.1% against a 10-year Treasury yield of 5.1%.

  Why this test

Buffett's test of consistent earning power is met, since the filings show no loss years and a return on invested capital of 48% in the latest year. The circle of competence test is only partly met: the business is easy to describe, but the numbers show it is hard to estimate its economics ten years out, with coffee costs, tariffs and a restructuring still under way. Owner earnings were $1.5B in the latest year against normalised owner earnings of $2.4B, which shows how much the reading depends on the year chosen. Buffett's rule that interest rates are gravity matters here, because the owner earnings yield of 2.1% sits well below the 10-year Treasury yield of 5.1%, so future cash is worth less today at current rates. The little debt test is mixed: total debt of $16.1B would take 6.8 yrs to repay from normalised owner earnings, and the annual report says that 'we may incur additional debt, within targeted levels, as part of our plans to fund our capital programs'. On capital allocation, the filing says 'we made no common stock share repurchases' in fiscal 2025, which fits Buffett's view that buybacks make sense only below intrinsic value. Return on equity cannot be measured in the latest year because shareholders' equity is negative at -$8.1B, so we cannot use it as a clean test of management.

• Operating margin in the next annual report compared with the latest year

  The filing expects the closures to be slightly accretive to operating margins, so a recovery would test whether the fall was temporary.

• Comparable store sales and comparable transactions

  The filing reports that comparable transactions declined, and a continued fall would weaken the case that Starbucks can raise prices without losing customers.

• Total debt and any new borrowing

  The filing says more debt may be used to fund capital programmes and shareholder returns, which would weaken the little debt test.

• Whether share repurchases resume and at what price

  Buffett's rule only supports buybacks below intrinsic value, and our base value sits far below the current price.

• Capital spending and store investment

  The filing expects capital spending to be moderately lower in fiscal 2026, and lower spending can lift owner earnings in a way that does not last.

Questions the filings couldn't answer

• What return do the store closures and restructuring earn? The excerpts give no return target for them.
• How much of the fall in operating margin will reverse? The filing does not give a normalised margin figure.
• Can Starbucks raise prices as comparable transactions fall? The excerpts do not show how customers respond to price rises.