Despite Chinese Growth, Bernstein Downgrades Starbucks On Slower American Business

Starbucks Corporation SBUX reported fiscal first-quarter earnings last week, disappointing some Wall Street analysts due to poor performance in the North American unit, but fueling optimism in others over the company's prospects in China.

The Analyst

Bernstein's Sara Senatore downgraded Starbucks' stock rating from Outperform to Market-Perform with a price target lowered from $67 to $64.

The Thesis

The case for being aggressive on Starbucks' stock at a time of disappointing metrics in the U.S. is based on the company's prospects for China, where a new store is being opened every 15 hours, Senatore said in a Monday note. (See the analyst's track record here.)

But the business mix shift isn't happening at a fast enough pace to offset the domestic problems, the analyst said.

Starbucks' prospects in China are comparable with Yum! Brands, Inc. YUM's aggressive growth in China, which picked up momentum in 2004 and prompted the company to spin its China-business into a new stock, Yum China Holdings Inc YUMC, Senatore said. The difference: unlike Yum's business back in 2004, Starbucks' business remains "meaningfully more weighted" to the U.S., she said.

The Chinese contribution to Starbucks' segment EBIT in fiscal 2017 was 8 percent and it's expected to grow to 13 percent in fiscal 2020, according to Bernstein. In contrast, Yum's China contribution to segment EBIT back in 2004 was 16 percent.

Starbucks' business mix continues to shift to China which does represent a "powerful long-term story," the analyst said. The issue is that it is happening at a pace that is "not fast enough" to offset softness in the North American business.