Wedbush's Firsthand Starbucks Checks Prompt Downgrade

The bullish case for Starbucks Corporation SBUX's stock was based on the company delivering same-store sales growth and upside to EPS consensus expectations. But after conducting firsthand checks, Wedbush concluded that the likelihood of both scenarios playing out has diminished.

The Analyst

Wedbush' Nick Setyan downgraded Starbucks' stock rating from Outperform to Neutral with a price target lowered from $70 to $56.

The Thesis

Recent checks conducted by Wedbush suggest the coffee restaurant chain's' U.S. same-store sales growth trajectory is tracking roughly in-line with the consensus estimate of 1.8 percent, Setyan said in the Thursday downgrade note.

While a 2-percent same-store figure could be possible, the near-term baseline comp from the company's technology initiatives now stands at 1-2 percent versus a prior estimate of 2 to 3 percent, the analyst said. The analyst's full fiscal 2019 same-store sales growth estimate is maintained at 2.5 percent, which is below both the consensus estimate of 3.3 percent and the company's own long-term guidance of 3-5 percent.

Starbucks guided its mainland China business to drive approximately one-quarter of total revenue growth in fiscal 2018 and 2019. But Wedbush's checks and analysis indicate the region will account for only one-fifth of fiscal 2019 revenue growth unless there is a "meaningful" acceleration in unit growth and same-store sales growth, Setyan said. 

The absence of any notable headwinds implies investors should be "increasingly cautious" with the company's ability to even achieve the low end of its long-term EPS growth targets of 12 to 15 percent, the analyst said. 

Price Action

Shares of Starbucks were trading lower by 1.1 percent early Thursday morning.

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