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Starbucks (NASDAQ:SBUX) could miss comparable sales estimates in the coming quarters as complex staffing and operational issues might take longer than expected to correct, while necessary and “significant investments” will weigh on earnings.
The sober outlook on Starbucks’ (NASDAQ:SBUX) traffic and valuation led Jefferies’ Andy Barish to downgrade the stock to Underperform from Hold and set a $76 price target that is 18% below Wednesday’s closing price.
“In our view, the stock has surpassed reasonable expectations for improving fundamentals,” Barish writes, citing credit/debit card data, foot traffic and app data, all of which indicate a risk to the consensus estimate for comparable sales of 2.2%.
Barish expects comparable sales trends will be “worse than expected” through 2027 with an uncertain macro environment not helping, albeit with offset possible from improving operations.
As for China, the sector “appears to remain a difficult competitive environment,” with most of the large and rapidly growing competitors offering significant value proposition compared to Starbucks. Barish notes that the company’s recent decision to lower prices on dozens of iced drinks to attract more afternoon business will ultimately lead to near zero operating margins for the China business.
“We believe a tough, long turnaround is still ahead given the complexity of the Starbucks size and cultural/operational issues,” Barish says, adding that he believes the 35x “premium” valuation is unwarranted given “overly optimistic” street expectations.
The downgrade is pressuring shares, last traded with a loss of nearly 2% ahead of Thursday’s open.
Wall Street analysts are mostly bullish on Starbucks (NASDAQ:SBUX) with a consensus Buy rating, while Seeking Alpha analysts and Quant rating view Starbucks (SBUX) as a Hold.