Starbucks downgraded as analyst cites execution challenges ahead

By James Rogers

Among the challenges facing new Starbucks CEO Brian Niccol is 'a discouraging macro outlook' in China, Jefferies says

Starbucks Corp. was downgraded by Jefferies Tuesday, as the analyst firm highlighted a number of hurdles in the path of new CEO Brian Niccol.

"While the new CEO suggests necessary strategic change is now on the table, we believe execution will be challenged as issues like [operations], culture, value perception and tech take time to fix," Jefferies analyst Andy Barish wrote in a note.

Starbucks shares (SBUX) were down 0.7% at 9:31 a.m. Eastern time Tuesday. The stock is down 1.4% in 2024, compared with the S&P 500 index's SPX gain of 20%.

Related: New Starbucks CEO Brian Niccol wants to fix confusing menu, long waits for coffee

Niccol joined the company on Sept. 9. Prior to taking the helm at the coffee chain, he was CEO of Chipotle Mexican Grill Inc., and before that he served as CEO of Yum! Brands Inc.'s Taco Bell and as president of Yum Brands! and Taco Bell.

In an open letter on Sept. 10, Niccol identified four key initial focus areas - "empowering baristas to take care of our customers," getting "the morning right, every morning," re-establishing "Starbucks as the community coffeehouse" and "telling our story."

"While the market has reacted favorably to the announcement of Brian Niccol as CEO (who we like) and his Sep 10 open letter w/ high-level thoughts," Barish wrote, "we'd note that the letter did not address the value perception/ops/culture issues and noted investments in tech, which could cut into the targeted $1 [billion] annual supply chain savings."

Related: Starbucks will likely make over $500 million on pumpkin-spice lattes this season. Is that enough?

Jefferies says that the company's fiscal fourth-quarter results could be a negative catalyst. The analyst firm expects U.S. same-store sales to decline 4%, versus a consensus estimate of a 2.8% decline, and also expects weaker-than-expected fiscal 2025 guidance. Jefferies thinks that fiscal 2025 could be a "throwaway" year for Starbucks in which it focuses on reinvesting and stabilizing, and then attempting to accelerate business. "We think [fiscal 2025 guidance] could be lower than expected," wrote Barish.

Set against this backdrop, Jefferies downgraded Starbucks to underperform and lowered its price target to $76 from $80.

Of 35 analysts surveyed by FactSet, 20 have an overweight or buy rating, 14 have a hold rating and one has a sell rating for Starbucks.

Related: Starbucks is trying to serve coffee faster and expand into smaller cities to turn business around

Citing the macroeconomic environment, Jefferies thinks it would be prudent for Starbucks to lower its long-term-growth algorithm. "We think the U.S./China [markets] should be growing but at a slower pace," Barish wrote, adding that this puts the company's 7% global unit growth target at risk. Jefferies thinks that a global unit growth target of around 5% is more realistic.

Jefferies also thinks Starbucks's target of more than 10% revenue growth is at risk and its earnings per share growth target of more than 15% appears unlikely in both the near term and the long term. "Frankly, these targets may not be consistently achievable anymore for a company of this size," Barish wrote. A 10% to 12% target for EPS growth "could serve as a realistic guide," he added.

The analyst firm now expects China same-store sales to decline 3%, versus a consensus estimate of 1.2% growth, "on a discouraging macro outlook there," according to Barish.

Related: Starbucks should make this dramatic move to help its stock, BofA says

In a note last week, Bank of America Securities said that Starbucks should consider licensing its China business, citing the potential of such a move to boost value for the coffee chain. "China is more volatile, less profitable and slower growth," Bank of America analyst Sara Senatore wrote in a note.

-James Rogers

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09-24-24 0948ET

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