Goldman Sachs downgraded Starbucks Corp. shares to neutral from buy, citing cost pressures that the coffee purveyor is feeling related to labor and inflation.
Analysts lowered their price target to $106 from $112.
Starbucks SBUX, -1.43% reported fiscal first-quarter earnings that fell short of Wall Street expectations, though revenue was ahead of consensus.
“Top-line trends in the U.S. generally remain strong; however, labor challenges related to higher wages (Starbucks announced wage increases in October 2021 which will continue to flow through in mid-2022), along with near/mid-term impacts from staffing levels, turnover, and COVID-related exclusions/sick pay will pressure margins,” wrote analysts led by Jared Garber.
“In China, same-store trends were materially pressured by COVID and the zero COVID policy, and we have limited visibility into when trends in the market fully
Starbucks acknowledged the higher costs related to the uncertainty of the pandemic, and detailed the impact that COVID continues to have.
“The highly transmissible Omicron variant amplified staffing shortages in our supply chain, resulting in higher-than-planned distribution and transportation costs,” said Starbucks Chief Executive Kevin Johnson on the late Tuesday earnings call, according to a FactSet transcript.
“We also experienced a significant increase in our industry-leading COVID-isolation pay for our partners and we saw higher-than-anticipated costs from training and onboarding of new Starbucks partners.”
Though the issues at Starbucks, and across many retail and consumer companies, are known to investors, with many expecting business conditions to improve during the later parts of the year, Goldman is wary.
“We remain cautious on the recovery given the consistent choppiness in trends, the potential for higher turnover to persist despite wage investments (thus driving higher training costs and lower labor productivity), higher distribution costs, and flow-through implications of consumer behavior normalization that drives more transactions and lower check averages,” analysts wrote.
Credit Suisse analysts, on the other hand, remain upbeat about the road ahead for Starbucks.
“Despite near-term challenges, our long-term thesis remains intact, and we continue to have confidence in the achievability of 8%-10% revenue growth, 18%-19% operating margin and double-digit [percentage] EPS growth,” analysts led by Lauren Silberman wrote.
Credit Suisse expects same-store sales to benefit from Starbucks’ loyalty program and digital sales, premium product, pricing power and other factors.
“We believe Starbucks is under-earning amidst COVID-related friction costs (labor shortages, sick pay, higher training, supply chain challenges), which we see as potential upside to margins and earnings in FY23 and beyond,” analysts said.
Credit Suisse rates Starbucks shares outperform with a $122 price target, down from $132.
MKM Partners rates Starbucks stock buy with a price target of $123, down from $130. And BTIG rates the stock buy with a $130 price target.
Like Goldman, a number of research groups also rate Starbucks neutral, including JPMorgan, which lowered its price target to $101 from $112.
RBC Capital Markets expects margins to moderate in fiscal 2022 and maintained its neutral stock rating. Analysts lowered their price target to $108 from $122.
UBS also rates Starbucks shares neutral with a $105 price target, down from $115, but was upbeat about the post-pandemic outlook.
“We expect focus will be on the implied increase in F2H22 earnings to help offset the F1H shortfall, any impacts from pricing or lower marketing, as well as FY23 earnings power and potential for more bullish scenarios,” analysts led by Dennis Geiger wrote.
“We believe Starbucks will emerge post-pandemic well positioned on global market share, with better into visibility into the margin & earnings trajectory needed as a catalyst from here.”
Starbucks shares slipped 0.7% on Wednesday, and are down 3.5% over the last year. The S&P 500 index SPX, +0.67% is up 19.3% over the past 12 months.