Starbucks Faces Major Brand Maturity Headwinds

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Starbucks Corp. (NASDAQ: SBUX) continues to face headwinds as investors and consumers see a maturing brand that is finding limited options for organic growth. After the close on Tuesday, Starbucks announced that the company was raising its target for cash returned to shareholders to $25 billion through fiscal year 2020, and that includes a 20% increase in the company’s common stock dividend. Unfortunately, Starbucks also lowered its internal growth metrics and its shares were lower as a result.

The company said in its release that its leadership are taking decisive steps to address an anticipated 1% growth in third-quarter comparable store sales. It further said that three newer major digital initiatives will contribute approximately 1% to 2% attributable to comparable sales in fiscal year 2019.

Driving the expected growth are accelerated growth plans in the U.S. and Chinese markets, expanding its Global Coffee Alliance and focusing on returns to shareholders. Unfortunately, 1% to 2% organic growth is not enough to entice investors.

Several Wall Street analysts have taken notice of Starbucks disappointing guidance as well. The prior consensus analyst target price from Thomson Reuters was $63.88, but that will be lower after these calls.

  • Webdbush maintained its Neutral rating but cut the target to $57 from $58.
  • Stifel lowered its target price to $55 from $58.
  • Mizuho lowered its price target to $56 from $60.
  • Morgan Stanley downgraded it to Equal Weight from Overweight with a $59 target.
  • BTIG downgraded Starbucks to Neutral from Buy.

President and CEO Kevin Johnson said:

While certain demand headwinds are transitory, and some of our cost increases are appropriate investments for the future, our recent performance does not reflect the potential of our exceptional brand and is not acceptable. We must move faster to address the more rapidly changing preferences and needs of our customers. Over the past year we have taken several actions to streamline the company, positioning us to increase our innovation agility as an organization and enhance focus on our core value drivers which serve as the foundation to re-accelerate growth and create long-term shareholder value.

Starbucks shares closed up 0.4% at $57.43 on Tuesday, and the shares were indicated down 3.8% at $55.25 on Wednesday. Its shares have a 52-week range of $52.58 to $61.94.