Analyst Says Starbucks Earnings Were 'Good Enough But Not Great'

Starbucks Corporation SBUX reported its fiscal second quarter results, which were "good enough but not great," according to Morgan Stanley.

The Analyst

Morgan Stanley's John Glass maintains an Overweight rating on Starbucks with an unchanged $72 price target.

The Thesis

Starbucks' earnings report contains "plenty to pick at," but there are multiple "encouraging" data points that don't justify a bearish stance on the stock, Glass said in a research report. U.S. comps, for example, showed a sequential improvement and a reiteration of 3 percent comps in the third quarter is "encouraging."

The afternoon business was weak, but at the same time it can be seen as a "source of opportunity," the analyst wrote. Specifically, if comps are indeed tracking at 3 percent, his implies the afternoon business could see a "meaningful improvement" with a renewed focus on winning over less frequent customers that make up around half of all afternoon traffic.

Glass said the company's U.S. margins were poor in the quarter given a 170 basis point decline from last year and other segments will see pressure in the bottom half of 2018. While investors have valid reason to be worried, at the end of the day the "best longer-term remedy" is sales improvement.

There are now signs of "incremental hope," including favorable shifts in marketing and promotions to focus on creating long lasting customer relationships, which is a "playbook that has worked well" for other restaurant chains.

Price Action

Shares of Starbucks were trading lower by 1.5 percent at $58.49 Friday morning.

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