Starbucks Corporation (Nasdaq: SBUX) reported a decline in customer spending growth in the most recent quarter, a trend that could make it difficult for the company to live up to expectations over the next couple of years.
While Starbucks will continue to benefit from digital enhancements, expanded menu offerings and personalized marketing, the stock’s upside may be limited until the company can get its customers opening their wallets a bit wider.
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Starbucks reported that customer spending growth declined from 8 percent in fiscal 2017 to “mid-single digits” in the first quarter.
According to Wedbush analyst Nick Setyan, there’s no clear reason to expect Starbucks to report same-store sales numbers above consensus expectations given that slowing growth. Following Wedbush’s latest round of store checks, the firm estimates that Starbucks grew its U.S. same-store sales by about 1.8 percent in its fiscal second quarter, roughly in line with consensus expectations of 2 percent growth.
Setyan says Starbucks has enough momentum to hit consensus expectations of 3 percent same-store sales growth in the second half of 2018, but the lack of growth catalysts will make it difficult for the company to live up to longer-term expectations. Wedbush is forecasting just 2.5 percent same-store sales growth in fiscal 2019. That estimate is below consensus expectations of 3.3 percent growth and the company’s guidance of 3 to 5 percent growth.
“We expect the absence of [fiscal year 2018] EPS headwinds, such as the sale of the Tazo business and the conversion of the Taiwan and Singapore operations to a licensed business model, to allow FY19 EPS growth to reach the current consensus expectation of 12 percent, or the low end of management’s 12 to 15 percent long-term EPS growth target,” Setyan says. “Nevertheless, we are increasingly cautious regarding the ability of Starbucks to achieve the low end of long-term guidance beyond FY19.”
While Setyan is skeptical Starbucks can hit its targets, Morningstar analyst R.J. Hottovy is not concerned about Starbucks’ lackluster U.S. traffic trends or its slowing growth.
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“While we appreciate investor concern about transaction trends, we believe ultimately these metrics will improve through new menu innovations developed at its premium locations, improved loyalty member acquisition and engagement techniques and simplified store operations/technologies,” Hottovy says.
Wedbush has a “neutral” rating and $56 price target for Starbucks. Morningstar has an “undervalued” rating and $68 fair value estimate for SBUX stock.
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There’s Trouble Ahead for Starbucks Corporation (SBUX) Stock originally appeared on usnews.com
