Undercover Analyst Reveals Concerns on Starbucks, Downgrades and Lowers PT

In a report published Monday, Belus Capital Advisors CEO and Chief Equities Strategist Brian Sozzi downgraded Starbucks Corporation SBUX from Buy to Hold and lowered the price target from $90.00 to $75.00 due to operational concerns and a reduced probability that the company will raise April EPS fiscal year guidance. In 2013, Starbucks was an easy recommend to investors due to the company's ability to "create great intrigue amongst investors on what it had in store product wise." The company locked its coffee been supply through 2014 with coffee bean prices down 20% in 2013. Further, Starbucks had a record FY13 EPS of $2.26. Despite Starbucks' "fast-track" success last year, Sozzi noted that the Street is ignoring Howard Schultz. The strategist commented, "the Street has not listened to a person still in the trenches with the stores and daily numbers, maintaining their forecasts either at the upper-end (mean consensus), or $0.05 above for super bulls, of Starbucks' outstanding FY14 EPS guidance range of $2.55-$2.65. I think the Street is living in 2013 instead of paying careful attention to Schultz' prescient comment that: 'Starbucks was not immune' to 'traditional retailers seeing in-store foot traffic give way to online shopping in a big way.'" Brian Sozzi observed Starbucks' operations from inside the stores as an undercover analyst for the past two months. The analyst reported that Starbucks has a case of "McDonald's Syndrome," where the menu is becoming too diverse and attributing to five major concerns. Sozzi first commented that consumers are foregoing ordering extra unwanted food items, as long lines directly correlate with individuals looking at the smartphone and become unprepared to order. He added that many stores are having re-stocking issues as the stores do not have "proper displays" to keep enough food items and a worker must be pulled from the counter to re-stock. In addition to the re-stocking concern, the strategist noted that Starbucks could have a more efficient process for their food platform, perhaps adding a runner to re-stock, prepare sandwiches, etc. Sozzi concluded that there are not enough registers (usually less than half of what McDonalds has) and he has seen an increase in order mistakes due to the extra stress from ever-growing lines. Starbucks closed at $77.67 on Friday. Shares are down approximately 0.54% in pre-market trading.