Starbucks Continues Grande Growth In China, But Flat US Traffic Hurts Quarter

Starbucks Corporation SBUX turned in a mixed quarter, bolstered by unexpectedly strong growth in China but marred by flat traffic in the U.S.

The reaction from the sell-side was also mixed, and a bit muted, with several analysts continuing to recommend the stock and raising the price target, but with Wells Fargo coming out with a downgrade.

The coffee giant reported a tax-driven beat on EPS at 60 cents in the second quarter, along with a raise in guidance.

The Analysts

• Wells Fargo’s Bonnie Herzog downgraded the stock from Outperform to Market Perform. She also lowered the price target from $83 to $80.
• Stephens analyst Will Slabaugh maintained an Equal Weight rating on the stock, raising the target price from $65 to $72.
• Wedbush's Nick Setyan raised the target price from $70 to $75 while maintaining a Neutral rating on the stock.
• Morgan Stanley’s John Glass raised the target price from $70 to $75, keeping an Equal Weight rating.
• Bank of America analyst Gregory Francfort is keeping a Buy rating on the stock, boosting the price objective from $75 to $85.

Starbucks shares traded around $77.04 at publication time Friday.

The Theses

Herzog noted in her downgrade note that Wells Fargo remains very confident in the chain’s long-term growth trajectory. But price now makes the stock less attractive, she said, with the coffee chain having made a 58 percent run-up in share price since mid-2018, leaving “limited room for additional upside in the near-to-medium term.”

Slabaugh said the 3 percent comparable-store sales growth in China will allay some of the fears over flat-to-negative traffic across the chain. Slabaugh also said despite traffic concerns, he remains impressed with Starbucks’ “beverage innovation” that’s often beating local niche competitors.

Setyan was also impressed by the unexpected comp store growth in China, but warned of near-term headwinds there, including increased competition and the slowing Chinese economy.

Glass praised Starbucks for its strong margin performance, stable U.S. comps and improving China sales, adding up to a solid quarter.

“But still-flat U.S. traffic and aggregate comps of 3 percent probably don't change how investors think about the rest-of-year sales trajectory,” Glass said.

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