Starbucks Bids Adieu to China. Why It Could Boost the Stock.

Starbucks is selling a large chunk of its China business to an alternative asset manager. (Wang Zhao / AFP / Getty Images)

Change keeps coming to Starbucks, and we’re not talking about the happy messages workers are now required to write on the cups even as some go on strike.

On Monday, Starbucks announced that it would sell a 60% stake in its China operation to Chinese asset manager Boyu Capital for a $4 billion enterprise value, while creating a joint venture that includes licensing payments to Starbucks. The company touted Boyu’s “depth of understanding of Chinese consumers” as the rationale for making the deal. It should be noted, however, that joining with a Chinese partner or creating a separately run Chinese company has been a way for U.S. brands to avoid being targeted by that government, while focusing on its other businesses.

Whatever the rationale, the JV seems to make sense for Starbucks. “We view the transaction as an incremental positive as Starbucks de-risks from China and sharpens focus on core U.S. market,” writes BMO Capital analyst Andrew Strelzik, who has an Outperform rating and $115 price target on the stock.

The strategy of finding local leadership for a U.S. brand has been in play before. In 2017, for instance, McDonald’s sold an 80% stake in its Chinese business to private-equity firm Carlyle Group and Citic Group, a state-owned conglomerate. (McDonald’s bought Carlyle’s stake in 2023, leaving it with a 48% stake.) In 2015, Yum! Brands, the owner of Pizza Hut and KFC, announced a spinoff of Yum China. That spinoff produced results: After producing below 1% annual same-store-sales growth in the three years leading up to the spin, Yum’s comps grew at a 2% annual clip over the following decade, according to FactSet. While the stock has underperformed the S&P 500 since the spin was announced, its 183% rise over that period outpaced the 125% average from large-cap fast-food stocks, including Chipotle Mexican Grill, McDonald’s, Domino’s Pizza, and Restaurant Brands International.

For Starbucks, the initial impact of the deal should be minimal. Evercore ISI analyst David Palmer estimates the deal will shed less than $100 million of operating profit, but that it would earn a lot of that back by using the $2 billion in transaction proceeds to pay down debt coming due over the next two years, wiping away some interest expense from the income statement. The deal should also boost Starbucks in China, Palmer says. Boyu plans to increase store growth back to a double-digit percentage rate, up from 5% in 2025. Palmer has an Outperform rating and $105 price target on the stock.

Starbucks’ CEO Brian Niccol, who had a long and successful run at Chipotle, can focus on restoring growth in the U.S. He and the management team are cutting back on menu items to create a simplified customer experience, redesigning stores, creating more comfortable seating, and rewiring the mobile app to complete orders faster. That’s key because over 34 million people are Starbucks Rewards members, a status earned by visiting the app or site. Management is also investing in new training and tools for employees to position them to move orders into customers’ hands faster.

Analysts now forecast annual same-store-sales growth of over 3% in 2026 and 2027, up from no growth expected this year, according to FactSet. North America, which accounts for three quarters of Starbucks’ revenue, would drive the growth, with analysts forecasting a near 3.5% annual increase. Add in some growth in stores—they should rise to nearly 44,000 in 2027, according to FactSet, up from just over 41,000 this year—and analysts see sales growing 5% annually to about $41.6 billion in 2027.

Starbucks also plans to cut general and administrative expenses by a bit more than $1 million through 2027**,** helping to produce higher operating profit margins and boosting earnings by 20% annually, to $3.17 a share, in 2027.

Based simply on those numbers, Starbucks stock could hit nearly $105 by the end of 2026, a 26% rise from a recent $82. But if the company can demonstrate it’s on track to reach those profit expectations, its valuation could get back to its 2025 high of 35, putting the stock at $111.

Wake up and smell that coffee.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com