Why It May Be Time to Bail on Starbucks

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Starbucks Corp. (NASDAQ: SBUX) has seen a tough run of things over the past year, and even just in 2018. And it appears that another cup of coffee won’t do the trick to wake up Starbucks. The problem seems to be the company is slowing down more than anything. As a result, one key analyst decided to take a step back on the coffee giant.

Wedbush downgraded Starbucks to a Neutral rating from Outperform and lowered its price target to $56 from $70, implying downside of 3% from Wednesday’s close of $57.90.

Recent checks by Wedbush point to U.S. same-store sales (SSS) growth roughly in line with 1.8% consensus, which continues to be driven by traction in mobile ordering and new food and beverage offerings such as the blonde espresso. The firm continues to believe a rounded-up Americas comp of 2% is realistic.

Loyalty is driving SSS growth, but the declining rate of growth renders upside to current expectations less likely. Wedbush further detailed in its report:

Given a year over year deceleration in spend per member growth to the “mid-single-digits” in fiscal first quarter versus fiscal 2017’s 8% year over year growth rate, we now view the near-term baseline comp from Starbucks’ technology initiatives as 1-2% versus our previous view of 2-3%. We expect spend per member growth to contribute towards the high end of the 1-2% range in the near-term, with the success of food/beverage innovation in any given quarter as the incremental layers of growth that could drive SSS growth above that range. We maintain our fiscal second quarter SSS growth estimate of 2% and our second half of 2018 SSS growth estimate of 3%, in-line with consensus. We also maintain our fiscal 2019 SSS growth estimate of 2.5% versus consensus of 3.3%, below management’s long-term guidance of 3-5%.

Back in January, management indicated that the Mainland China business is expected to drive about one-quarter of Starbucks’ total revenue growth in fiscal 2018 and fiscal 2019. However, Wedbush’s analysis indicates the Mainland China business is poised to drive only one-fifth of fiscal 2019 total revenue growth absent a meaningful acceleration in unit growth and SSS growth.

Ultimately, Wedbush lowered its earnings estimates for Starbucks. Looking ahead to fiscal 2018, Wedbush expects to see earnings per share (EPS) now at $2.48 as opposed to $2.50. And in 2019 the firm is calling for EPS of $2.79, down from the previous estimate of $2.84.

The consensus estimates call for $2.49 in EPS for fiscal 2018 and $2.80 in EPS for fiscal 2019.

A few other analysts recently issued calls on Starbucks as well:

  • Mizuho has a Neutral rating.
  • Sanford Bernstein has a Market Perform rating.
  • BMO Capital Markets has a Market Perform rating.
  • Barclays has an Equal Weight rating.

Over the past 52 weeks, Starbucks has underperformed the broad markets, with its shares up less than 1%. In just 2018 alone, the stock is up only 1%.

Shares of Starbucks closed the past week at $57.89 apiece, with a consensus analyst price target of $64.35 and a 52-week range of $52.58 to $64.87.