Starbucks wants to break with five years of stagnation on the stockmarket

Under pressure in China, where it has lost half of its market share in five years, Starbucks is now considering bringing in a co-shareholder and handing over management of its operations to refocus on the United States.

The brand operates just over 40,000 outlets worldwide, including 17,000 in the US, with the latter still generating three-quarters of its consolidated revenue. However, the situation there is worrying, as same-store sales have been falling for seven consecutive quarters and have been in negative territory for five consecutive quarters.

Looking at the five-year period from 2019 to 2024, Starbucks' revenue grew by 36%, from $26.5bn to $36.2bn. At the same time, pre-tax profit before exceptional items—such as disposals or asset impairments—increased by 25%, while the number of shares outstanding decreased by 8%.

While positive at first glance, these results mask the fact that cash flows are under pressure. Starbucks generated free cash flow of $3.3bn in 2024, roughly the same amount as in 2019. In this context, it is not surprising that the share price has remained flat.

This is particularly true given that net debt almost tripled over the period, from $8bn to $22bn. Indeed, Starbucks returned $30bn to its shareholders over five years—via $17bn in share buybacks and $13bn in dividends—which is significantly more than the total free cash flow of $19bn.

Throughout the previous ten-year cycle, the group founded by Howard Schultz "sank" its equity capital in order to finance itself solely through debt. This had the effect of significantly boosting its profitability, which undoubtedly explains why, despite its poor operating performance, Starbucks is still valued on the stock market at more than thirty times its latest free cash flow.

Some observers believe that a partial sale of its Chinese operations will reduce annual investment costs by at least a quarter or a fifth, thereby easing pressure on cash flows.

Others argue that the proceeds from such a sale could be used to reduce the group's debt. MarketScreener's forecast is that it will instead finance a new massive share buyback—comparable to that in 2019, in which Starbucks committed $10bn.

See also Luckin and Chagee are giving Starbucks a run for its money in China, published last week in this column.