4 Starbucks Analysts On Q2 Earnings: Brewing China Concerns, Strong US Demand And More

Starbucks shares were rallying Wednesday after the coffee chain reported a second-quarter sales beat.

The quarter was helped by strong growth and momentum in the North American segment. The big headwind facing the company is the impact of the China region, which analysts highlighted after the print. 

The Starbucks Analysts: Morgan Stanley analyst John Glass has an Equal Weight rating on Starbucks and lowered the price target from $94 to $87.

RBC Capital analyst Christopher Carril has a Sector Perform rating and lowered the price target from $86 to $85.

Wedbush analyst Nick Setyan has a Neutral rating and $81 price target.

KeyBanc analyst Eric Gonzalez has a Sector Weight rating. 

Starbucks Earnings Takeaways: Morgan Stanley's Glass is optimistic on Starbucks over the long term, but said he sees several question marks in short term tied to withdrawn guidance and higher spending.

“[The] brand is in a fortunate position that domestic demand remains strong,” Glass said.

Starbucks CEO Howard Schultz announced an acceleration to store growth plans in the U.S. in the company's second-quarter report.

The move by Starbucks to suspend guidance was the right one, said RBC's Carril. 

“SBUX has suspended its 2FH guidance – likely the correct move given each of these dynamic factors, but also likely to drive ongoing debate until SBUX’s Investor Day in September,” Carril said.

The analyst highlighted the growth of the company’s food sales in the quarter, with sales up 25% year-over-year.

The analyst also pointed to strong drive-thru sales in the second quarter, something CEO Schultz also highlighted in the quarterly report.

Wedbush's Setyan remains on the sideline for the Starbucks story due to a lack of visibility.

“We are encouraged by the outperformance of the N.A. segment as customer mobility improves and staffing levels normalize,” Setyan said.

Labor and inflation are concerns for Starbucks, but KeyBanc's Gonzalez said he liked the company’s report on North American segment demand and strong loyalty membership.

“North American SSS increased 12%, exceeding pre-COVID levels by approximately 18% despite store hour modifications,” Gonzalez said.

Related Link: Starbucks Q3 Earnings Highlights: Hits Record Q2 Revenue Despite China COVID-19 Setback 

China Effect: Glass said the outlook for the company in China was “substantially worse” than feared.

“Importantly, China sales have dropped precipitously since mid-February, a result of Covid lockdowns, declining 23% in the 2Q and exiting March, a better run-rate read,” Glass said.

China represents around 12% of total Starbucks company sales. Glass sees a China recovery coming in 2023 and other international markets helping to offset pressure.

The China segment saw comp sales down 23% in the second quarter, but Setyan sees things getting even worse.

“In the last week of March, comp in China was down 50%, and the impact of lockdowns will be even larger in Q3,” Setyan said.

SBUX Price Action: Starbucks shares were trading 6.03% higher at $78.81 late Wednesday morning, according to Benzinga Pro.