Why Wells Fargo Is Bullish On Starbucks Despite COVID-19 Headwinds

Coffee and food chain Starbucks Corporation SBUX faces near-term and long-term challenges from COVID-19, but the company is well-positioned to address these headwinds, according to Wells Fargo.

The Starbucks Analyst: Jon Tower initiated coverage of Starbucks with an Overweight rating and $92 price target.

The Starbucks Thesis: The pandemic could result in a long-term shift in consumer behavior, but Starbucks' strength in digital allows the company to oversee one-to-one marketing initiatives, Tower said in the Monday initiation note. (See his track record here.)

Every 1 million digital reward member sign-ups from low- to medium-frequency users translates to $80 million in annual sales and an incremental 50 basis points to U.S. same-store sales, he said. 

Coupled with Starbucks' focus on its experimental Tryer labs and its flexible asset base, the company is uniquely positioned to benefit from any consumer shifts, Tower said.

One of the long-term new consumer shifts could be a move from crowded cities to suburban areas, the analyst said.

This would be a notable catalyst for Starbucks, as suburban locations with drive-thru capabilities offer nearly double the per-store profit of a non-drive thru location, he said.

Many investors "have grown skeptical" of the company's ability to shift during the pandemic, but its operating model and strong balance sheet will position the chain to achieve its long-term growth targets, according to Wells Fargo.

SBUX Price Action: Shares of Starbucks were trading lower by 0.53% Monday morning at $73.77.

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