Should Investors Buy The Dip In Starbucks? These Street Analysts Are Saying No

Multiple Street analysts are hesitant in recommending Starbucks Corporation SBUX's stock, which is trading at new 52-week lows in reaction to a disappointing sales and outlook update.

The Analysts

• Stephens' Will Slabaugh maintained an Equal-Weight rating on Starbucks with an unchanged $58 price target.
• Stifel's Chris O'Cull maintained at Hold with a price target lowered from $58 to $55.
• Morgan Stanley's John Glass downgraded from Overweight to Equal-weight with a price target lowered from $72 to $59.
• Tigress Financial's Ivan Feinseth commented on Starbucks in his morning newsletter. 

Stephens: 'Worries' Remain

Starbucks said after Tuesday's market close that forecast global comps of 1 percent in the the third quarter, short of the 2.9-percent the Street was modeling, Slabaugh said in a research report. While the coffee chain does have a plan to accelerate growth and generate long-term value for shareholders through enhanced digital initiatives, the analyst said he "worries" the company doesn't have any "meaningful initiatives" to sufficiently improves sales and support the stock's valuation.

Stifel: 'Surprising' China Update

Ahead of Tuesday's announcement, investors had reason to be "bracing for somewhat challenged trends domestically," but Starbucks' update on the Chinese business was "more surprising," O'Cull said in a note. While the weakness in China could be attributed to an interruption in delivery services, the problem could persist and impact longer-term earnings growth, the analyst said. 

Starbucks' "long-argued" position that digital initiatives are accretive to sales is questionable, O'Cull said. The business is showing a decline in guests who are using the digital platform, so a "wait-and-see approach" is now appropriate, the analyst said. 

Related Link: Wall Street's Take On Starbucks Following Schultz's Departure

Morgan Stanley: Is Management Doing Enough?

Starbucks' preannouncment of "disappointing" sales in the U.S. prompts an important question: is management doing enough to turn around the business? Glass said. It's unclear to what degree digital initiatives will impact future sales, as a pattern of slower U.S. sales is now evident, the analyst said. Starbucks' decision to slow down unit growth may be "constructive," but also underscores the maturation of the brand, the analyst said. 

The poor Chinese sales outlook was a "negative surprise" that could be attributed to a disruption with a third-party delivery partner, Glass said. The narrative in China has shifted to become a "show-me" story moving forward, he said. 

Tigress: Capital Return More Important

More important to Starbucks' story moving forward is the company's commitment to return $25 billion to investors through fiscal 2020, Feinseth said in his morning newsletter. The chain's new digital strategy should contribute 1-2 percent in increased comps during fiscal 2019, and the ongoing growth initiate in China remains compelling, he said. 

Any near-term weakness in Starbucks' stock should be considered a buying opportunity, as investors should "look beyond the next quarter" to a longer-term strategy that Feinseth said will yield "significant upside" from current levels.

Price Action

Shares of Starbucks hit a new 52-week low Wednesday and were trading down 8.69 percent to $52.43 at the time of publication.

Related Link: Analyst Doesn't Expect Starbucks Sales To Be Hit By New 'Third Place Policy'