Starbucks Analysts Have Lukewarm Reaction To China, Delivery Plans

Starbucks SBUX shares were a bit less robust than a venti dark roast Friday after the company revised its growth expectations downward — and some analysts came away from the company’s investor day meeting a bit lukewarm on the stock.

Shares were down Friday despite announcements for expected growth through delivery and aggressive Chinese expansion plans after the company revised its long-term earnings growth forecast from 12 to 10 percent.

Starbucks outlined a growth strategy Thursday that includes more than just refilling the cup on its standard coffee shop model. It announced a partnership with UberEats, which Starbucks said will allow deliveries from about a quarter of its U.S. company-operated stories by the end of its second quarter.

Delivery is also part of its strategy in China via a partnership with Alibaba Group Holding Ltd BABA. The company wants a large presence there and said it plans to nearly double its Chinese stores count by opening 6,000 outlets by the end of 2022.

The company plans 2,100 new stores in total next year.

The Sell-Side Reacts

Analysts’ reactions were mixed, ranging from neutral and “cautiously optimistic,” to “incrementally positive” to Wells Fargo’s bullish outlook.

Here’s what some of those analysts had to say.

KeyBanc Stays Bullish

The lowering of the long-term growth forecast didn’t spook KeyBanc Capital Markets analyst Eric Gonzalez.

“While long-term growth outlook changes might serve as a modest negative surprise, our estimates for the next three fiscal years remain unchanged,” Gonzalez said.

“We left the meeting incrementally positive that the company's strategic growth and digital initiatives are contributing to ongoing momentum in the system and will facilitate a more sustainable/predictable earnings trajectory over the long term.”

KeyBanc has an Overweight rating on Starbucks with a $70 price target.

Wells Fargo: US Traffic 'Imperative'

Wells Fargo views the company’s growth plans as just about right, though it raised concern that U.S. store traffic has trended flat-to-negative in recent quarters.

“Although there wasn’t much of a ‘wow’ factor at the Dec. 13 event and not a ton of incremental news, we believe SBUX’s strategy is sound, and it’s doing the right things in a dynamic and incrementally more competitive environment,” said analyst Bonnie Herzog. 

Some investors might be skeptical about the company’s ability to hit updated long-term growth targets that include at least 10-percent EPS growth, the analyst said. Yet "we believe their (long-term) growth algorithm is doable/realistic given several initiatives to improve traffic as well as the company’s robust capital allocation plan."

For the stock to perform long-term, it's "imperative" that Starbucks fixes its U.S. traffic problem and finds positive inflection, according to Wells Fargo. 

Wells Fargo reiterated an Outperform rating and raised its price target from $66 to $73.  

Wedbush On The Sidelines

Wedbush is “cautiously optimistic” on the potential contribution from Chinese expansion, and the company is pursuing other partnerships with Alibaba beyond delivery, including virtual stores that work with mobile apps, analyst Nick Setyan said.

Starbucks faces increased competition in China, and the country's economy is slowing, the analyst said.

“While we continue to see little risk to near- and medium-term expectations, we also do not expect near-term drivers of positive revisions to materialize." 

Webush maintained a Neutral rating with a $64 price target.  

BMO 'Incrementally Positive' After Company Event

BMO Capital Markets’ Andrew Strelzik was a bit more positive.

“Although SBUX's prudent lowering of long-term algorithm may have caught the market by surprise, we came away from 2018 Investor Day incrementally positive,” Strelzik said. “There remain longer-term questions, but SBUX is taking steps to better position with respect to maturity curve, competition and customer changes.”

The company’s domestic delivery plans “may be a growth opportunity,” the analyst said said, but he noted that details from SBUX on the program are still fuzzy.

Strelzik said he was concerned that delivery has been increasing restaurant sales in the U.S. have mostly come at night, “which does not align well” with coffee sales.

BMO reiterated a Market Perform rating with a $63 price target. 

Tigress Sees Upside Ahead 

Tigress Financial analyst Ivan Feinseth continues to recommend Starbucks as an investment and noted the other methods by which Starbucks plans to branch out, including opening its fourth premium café and roastery in New York City on Friday and a recently announced deal with Nestle.

“I believe significant upside exists from current levels and continue to recommend purchase,” Feinseth said 

Starbucks shares were down 2.51 percent at $65.23 at the time of publication Friday. 

Related Links: 

Starbucks CEO Talks China With Cramer

KeyBanc: Starbucks Is A Buy Despite Recent Weakness