Starbucks: Slower Growth and Contracting Margins Ahead

Coffee retailer Starbucks (SBUX) is heading for a period of slower growth and contracting margins, according to Quo Vadis President John Zolidis. I’m neutral on SBUX shares. (See Insiders’ Hot Stocks on TipRanks)

“What we’re left with is a very high-quality company for all the reasons investors appreciate SBUX, but which is going through a period of slower growth, and contracting margins,” Zolidis stated.

“The sources of the growth slowdown and margin contraction are partially due to the environment, but they also seem to be of SBUX’s own making, as the company is proactively taking up wages in stores. This may be the right long-term decision for the company, but we argue it means a lower multiple for the stock.”

Starbucks Faces a Challenging Environment

Zolidis’s comment follows the release of the company’s Q4 financial report last week, which trailed analysts’ revenue expectations, thanks to a decline in same-store China sales.

Starbucks has 4704 stores in China, where the company faces a challenging environment due to the resurgence of COVID-19 in some provinces it operates in and harsh criticism of private businesses by the government.

Compounding the challenges Starbucks is facing in China are the challenges the company encounters at home, such as a tight labor market and a movement by its workers to unionize. That could explain its decision to “double-down” on what it pays its baristas and other store associates, which it calls investments.

“Today we announce we will be doubling-down on our investments in our partners, the heartbeat of our company,” said Kevin Johnson, president and CEO. “We know that when we exceed the expectations of our people, they in turn exceed the expectations of our customers – which creates value for all of our stakeholders – our partners, our customers, our communities and our shareholders. We anticipate that our strong business momentum, increased operating efficiency and continued global store expansion will fund these unprecedented investments while delivering yet another year of significant growth.”

Simply put, Starbucks expects the pick-up in sales and productivity to absorb the cost of these “investments.”

TipRanks’ Smart Score

According to TipRanks’ Smart Score rating system, SBUX scores a 9 out of 10, giving it an Outperform rating. Positive analyst, blogger, hedge fund, and news sentiment, as well as positive technicals, are the reason for the high rating.

Over the last twelve months, SBUX shares have gained 26.8%, trailing the 38.8% gains of the S&P 500 (SPY) in the same period. That’s a divergence from the long-term trend whereby Starbucks outperformed the S&P500 by a big margin.

Wall Street’s Take

Turning to Wall Street, SBUX has a Moderate Buy consensus rating based on 15 Buys and eight Holds assigned in the past three months. At $124.24, the average Starbucks price target implies 11.2% upside potential.

While that isn’t that lousy of a return in a low-interest environment, Zolidis believes in better investment opportunities elsewhere on Wall Street.

Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of Starbucks.
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