Analyst pours cold water on Starbucks' turnaround, as customers aren't happy

TD Cowen downgraded Starbucks to hold from buy, citing declining consumer perceptions of value and quality relative to peers and increased labor costs not yet factored into Wall Street's earnings expectations. Analyst Andrew Charles believes Starbucks' turnaround efforts may face complications, referencing data indicating that frequent customers are likely to reduce visit frequency. While maintaining a $90 price target, the downgrade reflects concerns that Starbucks' earnings are settling into a new base, differing from consensus expectations of a return to previous margin levels.

Analysis

TD Cowen has downgraded Starbucks Corp. (SBUX) stock to 'hold' from 'buy', primarily due to declining consumer perceptions of value and quality relative to its peers, alongside concerns that higher labor costs and increasing competition are not fully priced into Wall Street's earnings expectations. Analyst Andrew Charles highlights exclusive data indicating a potential reduction in visit frequency from Starbucks' regular customers. The report posits that Starbucks may have over-earned in the immediate post-COVID period and is now settling into a new, lower earnings base, contrasting with the consensus view that anticipates a return to previous margin levels by 2025. Despite these concerns and the downgrade, TD Cowen reiterated its $90 price target, balancing a favorable view of CEO Brian Niccol's turnaround capabilities against the likelihood of downward earnings revisions. Starbucks' stock fell 1.4% in premarket trading following the announcement, after a 7.4% rally in May. Year-to-date through Wednesday, the stock had fallen 5.8%, while the S&P 500 edged up 0.1%. The current average analyst price target of $89.96 implies a modest 4.6% upside, with 15 out of 36 FactSet-surveyed analysts maintaining a bullish stance, 19 neutral, and two bearish.

Key Decisions for Investors

• Investors should consider the increased risk profile for Starbucks stemming from observed declines in consumer value perception and unaddressed labor cost impacts, which could lead to earnings disappointments relative to current consensus.
• Exercise caution regarding near-term earnings expectations, as TD Cowen's analysis suggests Wall Street may need to adjust forecasts downwards to reflect a potentially new, lower earnings baseline for the company.
• While the $90 price target by TD Cowen is maintained, the downgrade to 'hold' and the limited upside implied by the average analyst target suggest a neutral positioning may be appropriate until tangible evidence of successful mitigation of these headwinds and a sustained turnaround materializes.