Bullish indicating open at $55-$60, IPO prices at $37
Investing.com -- A potential $10 billion sale of Starbucks’ China business could provide the company with financial firepower to accelerate its turnaround strategy, Bernstein analysts said.
The broker views the transaction as a possible catalyst for stock re-acceleration, as refranchising would help Starbucks (NASDAQ:SBUX) become more asset-light and reduce exposure to China’s volatile geopolitical and competitive landscape.
“We believe that the $10B proceeds could be a further unlock to the stock, as they could be reinvested in the business to accelerate the turnaround,” a team led by Danilo Gargiulo said in a Thursday note.
They also see a possibility that some of the proceeds could be returned to shareholders.
Starbucks has struggled in China amid rising competition from local brands like Luckin and Cotti, with market share falling from 42% in 2019 to 14% in 2024 and Average Unit Volumes (AUV) down 43%.
Under these conditions, Bernstein estimates the China business is worth $5–7 billion if kept under direct ownership.
The analysts expect more moderate unit growth of 7–8%, down from the historical 10–15%, as the company focuses on being selective with locations to preserve cash-on-cash returns. Same-store sales are forecast at 2%, while operating margins, which peaked at 15%, are “unlikely to change in the near future," the analysts added.
A $10 billion valuation would imply either aggressive store growth or significantly improved margins, both of which Bernstein sees as challenging. Still, a local partner with a different growth appetite may pursue faster expansion to justify such a price.
“Alternatively, a more likely path for the local partner would be to increase the speed of store openings to a compound annual growth rate (CAGR) of 15% to reach a valuation of $10B,” the analysts wrote.
They believe Starbucks would likely retain a stake in the China operations to benefit from future growth. Meanwhile, proceeds from a sale could be used to bolster investments in the U.S. turnaround, including the Green Apron initiative, or be directed toward shareholder returns.
Bernstein thinks this strategic shift could support a valuation of over 30x earnings in a normalized post-2028 environment.
The broker maintains an Outperform rating on the stock with a $100 price target. It sees potential for a $135 share price within three years, implying 42% upside from current levels.