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Sales Weakness Leads to Fair Value Cut for Starbucks

The wide-moat firm's strategic actions are a first step, but more aggressive measures may be required to drive bottom-line improvement.

Securities In This Article
Starbucks Corp
(SBUX)

On the surface,

Management's updated outlook--including third-quarter global comps of 1% and a $0.10 reduction in its full-year adjusted EPS range to $2.39-$2.43--isn't terribly surprising, given the April racial bias incident in Philadelphia and subsequent employee training efforts. Following the second-quarter update, we wrote that 3% full-year global comps were likely a best-case scenario and that other strategic efforts in the works (personalized happy hour, labor deployment) would probably weigh on margins. However, while management said comps trends had improved and are currently running around 3%, we find the decline in China segment comps to approximately flat growth from recent trends in the high single digits troubling, especially with management highlighting underperforming holiday items as one of the key reasons (in addition to Starbucks lacking delivery options and cannibalization from new stores).

While we're not ready to revisit the brand intangible asset behind our wide moat rating, we find the execution missteps frustrating and plan to reduce our $68 fair value estimate by roughly 5% to account for projected near-term sales weakness, partly tempered by store closings and SG&A reduction plans.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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