Starbucks' (SBUX) ability to offset rising labor costs with higher customer traffic is a key challenge for fiscal 2025 and 2026, RBC Capital Markets said.

The brokerage said in a Tuesday note that incremental labor investments, mainly from expanded store hours across roughly 80% of Starbucks' more than 10,000 stores, could weigh on margins.

RBC modeled a wide range of outcomes, with a mid-case scenario estimating a 10% increase in labor hours per store, translating to about $527 million in additional costs and a 10.7% EPS headwind to fiscal 2026 Street estimates.

A recent 700-store test showed that more staffing improved speed-of-service and reduced wait times, which led to some transaction gains.

The brokerage estimates Starbucks would need about a 3.1% increase in North America traffic at a 60% incremental margin to fully offset the added labor expenses. The company is scaling the test to 1,500 stores and expects to reach at least 3,000 by the end of September.

The firm said demonstrating that this labor investment will drive enough sales growth to protect margins is key to improving investor sentiment. RBC also flagged risks from higher coffee prices, which could pose a 216 basis point headwind if elevated levels persist, and said Street estimates for general and administrative cost savings in fiscal 2026 appear too optimistic.

RBC modestly raised its EPS estimate for fiscal 2025 to 1.7% below consensus but lowered its fiscal 2026 forecast to 5.5% below consensus.

Despite the downward revisions, the firm maintained its outperform rating on the company's stock, with a price target of $95, citing already-lowered buy-side expectations for fiscal 2026 margins.

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