Cost Pressures Drag SBUX Margins Down 500 bps: More Pain Ahead?

Starbucks Corporation SBUX reported a solid top-line finish to fiscal 2025, but profitability told a more challenging story.

In fourth-quarter fiscal 2025, consolidated operating margin declined 500 basis points year over year to 9.4%, pressured primarily by persistent inflation, especially elevated coffee prices and tariffs, and increased labor expenses tied to the company’s “Back to Starbucks” investment plan. The margin contraction outweighed modest revenue gains, resulting in a 34% drop in EPS to 52 cents in the fiscal fourth quarter.

The inflation backdrop shows few signs of easing in the near term. Management acknowledged that coffee costs remain stubbornly high, with relief unlikely before the back half of fiscal 2026. At the same time, Starbucks continues to commit capital toward improving customer experience and service quality. Green Apron Service, a key component of the turnaround strategy, requires higher staffing levels and operational hours, which will continue to annualize into early fiscal 2026.

These cost burdens raise the question: how long will margins stay under pressure? While the company is pursuing efficiency initiatives and expects lower G&A to provide partial offsets next year, earnings are still likely to lag sales recovery until transaction momentum becomes more sustainable. Management remains confident that recent improvements in U.S. comps, particularly morning traffic, signal that the turnaround is gaining traction, but recoveries, they caution, “are not always linear.”

Starbucks is rebuilding the brand for long-term growth. Yet with inflation continuing to brew and investments still ramping, profitability may remain strained until the company fully reclaims operating leverage.

Competitive Landscape: Rivals Navigating Similar Margin Pressures

Starbucks is not alone in battling cost inflation and profitability challenges across the beverage and quick-service landscape. Dutch Bros Inc. BROS, a fast-growing competitor in the specialty beverage space, has also faced margin strain as commodity inflation and labor investments outweighed sales growth. Like Starbucks’ strategy, Dutch Bros has prioritized building guest experience and expanding units, which has pressured near-term earnings while management focuses on driving scale efficiencies and improving store-level economics. The company’s rapid expansion model exposes it to rising construction and wage costs, a dynamic that mirrors Starbucks’ short-term profitability trade-offs despite long-term growth ambitions.

Meanwhile, McDonald’s Corporation MCD, a major competitor through its McCafé platform, has adopted a more aggressive pricing approach to offset persistent inflation. While this has supported margin stability, it risks pushing value-sensitive consumers toward competitors. As younger consumers become more selective, the brand experience and beverage innovation that Starbucks is investing in may ultimately prove more resilient than discount-driven traffic.

SBUX’s Price Performance, Valuation & Estimates

Shares of Starbucks have gained 0.2% in the past six months against the industry’s decline of 11.2%.

Price Performance 

From a valuation standpoint, Starbucks trades at a forward price-to-sales ratio of 2.48, below the industry’s average of 3.39.

P/S (F12M)

The Zacks Consensus Estimate for SBUX’s fiscal 2026 and 2027 EPS implies a gain of 16.9% and 23.6%, respectively, year over year. The EPS estimates for fiscal 2026 and 2027 have declined in the past 30 days.

Starbucks currently has a Zacks Rank #4 (Sell).

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This article originally published on Zacks Investment Research (zacks.com).

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