Shares of Starbucks came under pressure after RBC Capital Markets downgraded the coffee giant, citing rising labor costs, elevated investor expectations, and uncertainty around margin improvement.
The brokerage cut its rating to “Sector Perform” from “Outperform” while maintaining a price target of $105, implying modest upside from current levels.
Starbucks shares fell 0.9% to $96.69 on Wednesday.
Despite the downgrade, the stock has performed strongly this year, gaining about 16% since January, significantly outperforming the S&P 500, which has declined 1.9% over the same period.
Labor costs and investment concerns weigh on outlook
RBC said its earlier bullish stance, initiated in November 2024, was based on the expectation that relatively modest and temporary investments would be sufficient to turn around Starbucks’ US business.
However, analysts now believe that those assumptions no longer hold, as the company faces ongoing labor challenges and higher-than-expected investment needs.
In July 2025, Starbucks announced plans to invest more than $500 million in additional labor over the following year, reflecting the scale of operational adjustments required.
“Investment in the business is larger than we previously expected and there’s lack of visibility on cost savings [and] hence margin improvements,” RBC analyst Logan Reich said.
Reich added that the investments required to support growth appear more permanent than initially anticipated, complicating the company’s path to improving profitability.
“While we continue to believe there’s room for further [North America] top-line improvement and view FY28 [same-store sales] growth targets as achievable, investments required to drive the improvement are larger and more permanent than we previously thought and the path to margin improvement remains somewhat unclear,” he wrote.
Valuation concerns and elevated expectations
RBC also flagged valuation concerns, noting that Starbucks shares are trading at a premium relative to historical averages.
The analyst argued that investor expectations for growth remain high, leaving limited room for upside surprises.
He added that the stock’s risk-reward profile appears balanced at current levels, reducing its attractiveness for new investors.
“Given consistent incremental improvements in topline as management executes the turnaround strategy, we think investor expectations around continued improvement and solid execution are elevated,” Reich wrote.
“Stock is trading at premium to historical averages. Modeling out P & L through FY35 suggests risk/reward is balanced at current levels,” he said.
According to FactSet data, analyst sentiment on Starbucks remains mixed, with 40% rating the stock a Buy, 48% assigning a Hold rating, and the remainder recommending Sell.
Labor disputes and governance concerns persist
Beyond financial considerations, Starbucks continues to face scrutiny over its handling of labor relations.
Proxy advisory firms have raised concerns about the company’s approach to ongoing labor disputes and governance oversight.
“There are ongoing controversies related to labor disputes, and it is not clear there is sufficient board oversight of the company’s management of labor relations,” analysts at Institutional Shareholder Services wrote.
The concerns come amid prolonged tensions with unionized workers, including strikes across multiple US cities and ongoing contract negotiations.
Glass Lewis also criticized Starbucks’ decision to dissolve a board committee dedicated to overseeing labor issues, recommending that shareholders vote against re-electing a key board member.
The company has defended its governance structure, stating that labor oversight responsibilities have been reassigned across the board and that it remains focused on long-term shareholder value.
Starbucks also highlighted employee benefits such as healthcare, parental leave, and tuition support, positioning itself as a competitive employer in the retail sector.
While the company continues to deliver sales growth and execute its turnaround strategy, the combination of rising costs, labor challenges, and elevated expectations is prompting a more cautious stance from analysts.
For investors, the key question remains whether Starbucks can sustain its growth trajectory while managing these pressures, or if current valuations already reflect much of the upside potential.
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