Melius Research Upgrades Starbucks Amid Turnaround Proof

One of Wall Street's biggest Starbucks skeptics is no longer betting against CEO Brian Niccol's turnaround. Melius Research on Monday upgraded Starbucks to hold from sell, saying the coffee chain has finally delivered proof that improving customer traffic is translating into stronger profitability. In recent quarters, one of the debates surrounding Starbucks centered on whether Niccol's Back to Starbucks plan would start translating into an improved bottom line. The strategy includes adding labor through the Green Apron initiative (improved customer service), simplifying the menu by roughly 20%, pulling back on discounting in favor of brand-building, and closing weaker stores while investing in stronger locations. While comparable sales had begun to recover, some questioned whether those investments would generate enough earnings growth to justify the stock's premium valuation. After last week's strong earnings report, Melius thinks that debate has largely been settled. "The comp recovery is no longer new; it is established," the firm wrote in a note to clients, pointing to four consecutive quarters of positive global comparable sales. More importantly, North America operating margin expanded year over year in the fiscal third quarter for the first time since early 2024, providing "the specific proof our Sell said was missing." To be sure, Starbucks still has work to do. Management sees additional opportunities to increase traffic, especially in the afternoons, and further expand operating margins. It's also worth noting that some of the quarter's profit improvement benefited from tariff refunds, although management said margins still expanded year over year even excluding that benefit. Still, Jim Cramer has liked what he's seen so far. Following last week's earnings, we raised our price target to $120, implying a roughly 15% upside from current levels. He grew even more confident in Starbucks' recovery after interviewing Niccol on CNBC last week. "I'm a big believer in Brian," Jim said, pointing to the successful turnaround he led at Chipotle. "I think he's a winner." Melius highlighted Starbucks' decision to raise its full-year outlook for earnings per share, operating margin and comparable sales, saying the guidance suggests the turnaround is becoming more durable rather than simply producing a one-quarter rebound. "The debate from here is no longer whether the turnaround works," the analyst wrote. "It is how quickly the margin build compounds from a repaired base, and what that trajectory is worth." Despite the upgrade, the firm stopped short of becoming outright bullish. Melius raised its price target to $110 from $85, but noted Starbucks already trades at roughly 40 times expected fiscal 2026 earnings, leaving much of the turnaround reflected in the stock price. "The turnaround is real, and the price already reflects a lot of it," the analysts wrote. Starbucks shares are up roughly 14% since Niccol took over as CEO in September 2024, trailing behind the S&P 500 during that stretch. But this year, the coffee chain's stock is the outperformer, up 25% vs 11%, a sign investors are growing more confident in the turnaround. "This move [in the stock] has got real gravitas," Jim said. "The comps are up. The profits are up. I think it's a very serious turn."