Starbucks: Losses to Speed Up on Craft Coffee Buzz
Seattle-based food and beverage chain Starbucks Corp. (SBUX) saw its shares dip on Friday on a bearish note from a team of Wall Street analysts that foresees new competition and questionable customer loyalty to drag on sales at the coffee giant.
(See also: Apple, Nike, Starbucks May Be Hit in Trade War.)
Competition from Smaller Rivals, Brand Loyalty Weakness Threaten Coffee Giant
According to analysts at Cowen & Co., who downgraded SBUX stock from outperform to market perform, Starbucks may suffer continued market share declines as smaller craft and artisanal coffee locations chip away at same-store sales.
“We find competitive growth critical to monitor, as we believe this is largely responsible for Starbucks’ deteriorating beverage same-store sales,” wrote Cowen’s Andrew Charles, who reduced his price target on SBUX from $68 to $65, reflecting a 9.7% upside over 12 months. He highlights the “success of independent ready-to-drink coffee growth” as a signal of craft’s growing popularity over the international coffee behemoth.
The chain has struggled to boost sales over the past few years, with some on Street indicating that its thousands of locations have finally started cannibalizing each other’s sales. According to Charles, food sales are currently outpacing beverage sales, which spells bad news for earnings quality.
“We note a deteriorating quality of EPS growth from softer comps and food sales outpacing beverage sales, which has implications for labor and gross margin deleverage,” wrote the analyst.
SBUX is expected to broaden loyalty efforts to “aggressively target new and lapsed brand customers,” yet Cowen sees these efforts as highly uncertain. Charles added that Starbucks saw an unusually low amount of gift card activations in the most recent holiday season, a leading indicator of the success of loyalty efforts this year.
Taking into account negative headwinds, the analyst reduced his 2018 same-store sales estimate from 2.8% to 2.3%. In 2019, he reduced his same-store sales target from 4% to 3%.
The downbeat note comes as Starbucks grapples with negative media attention this weekend, pulling shares down 0.4% in pre-market trading at $59.03. Chief Executive Officer (CEO) Kevin Johnson offered a public apology after the arrest of two black men at one of the chain’s Philadelphia stores last week and promised to investigate the alleged incident of racial profiling. Protestors are now reportedly targeting Starbucks locations in response to the Apr 12 incident, wherein the two men, later identified as real estate brokers, were arrested after a company employee called the police while the two were sitting at the store waiting for a friend to order a drink. The incident was captured on video.