Analyst: Starbucks Stock Remains Robust, But Keep Eye On China

Starbucks Corporation SBUX should issue a robust first-quarter report Jan. 24 on the tailwind of strong same-store sales growt, positive restaurant and retail trends in December and indications of successful recent ad campaigns, according to RBC Capital Markets.

The firm said to keep an eye on China, where Starbucks is pinning its hopes for international success. The trade war could bring some consumer backlash — and Starbucks has a new competitor to contend with.

The Analyst

Analyst David Palmer maintained an Outperform rating on Starbucks with a $74 price target. 

The Thesis

RBC believes Starbucks could post 3-4 percent U.S. same-store sales growth in 2019, and there’s upside potential for RBC’s 3-percent American same-store growth Q1 estimate, Palmer said in a Thursday note. 

Starbucks appeared to have a good December, thanks in part to what the company said were good results from a TV ad campaign and an overall positive holiday season for restaurant traffic, the analyst said. 

Palmer noted, however, that some of the high expectations may already be priced into the stock, which has seen solid growth over the last several quarters.

Watch China

One thing investors will be watching for when Starbucks reports results later this month is whether the U.S.-China trade spat is affecting consumer sentiment in China.

Starbucks, which opened its first Chinese store in 1999, has ascribed some of its international growth goals on a strong lean into the China market. The Seattle-based chain said last year it plans double the number of coffee shops it operates in China to 6,000 by 2022.

But then came the trade war.

“Investors will be eager to assess risks in China from lower consumer sentiment, potential U.S. brand backlash and growing discounter competition,” Palmer said. 

Goldman Sachs lowered its rating on Starbucks to Neutral from Buy earlier this month, citing concerns about China sales.

But RBC’s Palmer wasn’t ready to downgrade — and said there are factors that could insulate Starbucks from anti-U.S. sentiment, including strong support from the Starbucks Chinese workforce, a partnership the company has with online retailer Alibaba Group Holding Ltd BABA and a relatively low price point relative to other luxury goods in China.

Starbucks may have other problems in China, the analyst said. 

Chinese discount coffee startup Luckin' is spending millions on ramping up in a bid to challenge Starbucks.

“This will be an emerging risk as Starbucks sets its sights on doubling the store base by FY22,” Palmer said. 

Price Action

Starbucks shares were 0.65-percent higher at $64.70 at the close Friday. 

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