Shares of Starbucks (SBUX) are sliding in early trading after Goldman Sachs downgraded the stock to Neutral this morning, citing worries about its near-term outlook in the U.S. and concerns about its trajectory in China.
GOLDMAN, BMO MORE CAUTIOUS ON STARBUCKS: Goldman Sachs analyst Karen Holthouse downgraded Starbucks to Neutral and lowered her price target for the shares to $68 from $75, stating that she remains "reasonably confident" that initiatives to drive digital engagement can lead to a "more stable" 3%-4% same-store sales trajectory in the U.S. over the next few years but gift cards and digital trends could be points of caution in fiscal Q1. Additionally, she notes that the stock's valuation has "rapidly re-rated" to reflect the more stable comp trajectory in the U.S. Further, she voiced "incremental concerns" regarding China's macro environment and the company's comp trajectory in that region. Other consumer companies, like Apple (AAPL) and McDonald's (MCD), have noted weakness in China, the analyst points out. Also expressing some caution this morning, BMO Capital analyst Andrew Strelzik lowered his price target on Starbucks to $60 from $63 and kept his Market Perform rating, saying the company's "valuation resiliency" appears to be "disconnected" from changes to the fundamentals. The analyst notes that in spite of trading at "multiyear high relative valuation metrics", Starbucks is facing slower growth and a less solid outlook for its China market.
APPLE STOKES CHINA CONCERNS: On January 2, Apple reduced its revenue guidance for the December quarter largely due to weaker than anticipated sales in Greater China due to macroeconomic factors, including trade tensions with the U.S. In reaction, Wall Street analysts lowered their Apple targets and at least two downgraded the stock, including Loop Capital's Ananda Baruah and Jefferies' Timothy O'Shea. UBS analyst Timothy Arcuri recently analyzed the Apple miss in an attempt to determine whether it was due to the company losing market share or general handset market weakness in China. His analysis suggests it is a combination of both, concluding iPhone demand appears to have fallen precipitously but also the China market is clearly soft.
JPMORGAN STILL BULLISH: On December 19, JPMorgan analyst John Ivankoe said that he liked shares of Starbucks at then-current levels after visiting the company's Seattle headquarters with a group of investors. Improved visibility into U.S. comp improvement, driven by various sales-driving initiatives along with 6%-7% global unit growth, will allow Starbucks to sustain a premium multiple, Ivankoe told investors at that time. He kept an Overweight rating on the shares with a $70 price target. On December 19, Starbucks shares opened at $65.16 and closed at $64.06.
PULLING BACK HIGH END ASPIRATIONS: Earlier this week, The Wall Street Journal reported that current CEO Kevin Johnson is dialing back the previous plans of former CEO Howard Schultz to open a thousand high-end Reserve coffee bars. "One thousand was an aspiration," said Johnson, who stated that Starbucks will test six to 10 Reserve stores to see if they can generate the necessary returns before they go any further, according to the Journal.
PRICE ACTION: In early trading, Starbucks shares are down $1.78, or 2.8%, to $62.41.