Starbucks stock jumps on promise of bigger profit, but analysts doubt ‘almost shocking’ targets
Shares of Starbucks Corp. rallied on Wednesday after the company rolled out ambitious new sales and earnings targets, but Wall Street analysts warned the new targets could be too optimistic.
the executives, in a presentation at Investor Day on Tuesday afternoon, said they expect same-store sales growth of 7% to 9% in fiscal 2023 year-on-year. fiscal 2025, versus an earlier range of 4% to 5%, with a big rebound in China from the COVID-19 related lockdowns. Executives at the giant coffee chain said they expect annual global revenue growth of 10% to 12% over this period, also up from previous expectations, with adjusted annual growth in the earnings per share of 15% to 20%.
Read more: Starbucks to open 3,000 new stores in China despite declining sales due to COVID lockdowns
The targets showed “‘Ambition’ (with a!),” JPMorgan analysts said in a research note on Wednesday that called the executives’ advice “the optimistic side of the realistic.” BTIG analysts described the forecast as “almost shocking”, leaving them “both impressed and slightly curious” while noting possible investor skepticism amid concerns over macro issues.
At least 11 analysts raised their price targets on the stock in response to the presentation and one improved the stock, according to FactSet, and Starbucks shares gained more than 5% in afternoon trading. In their notes, however, many analysts expressed similar skepticism, especially for the well-known earnings forecasts.
“A 15-20% EPS growth rate on F23-F25 was given, coincidentally matching the blessed growth rate at the December 2016 analyst day which later had to be lowered twice as stretch targets store growth, compensation and margin were to be contained over the next 18 months,” the JPMorgan analysts wrote, while maintaining an overweight rating and raising their price target to $100 from 92. $.
“We prefer to model near the bottom of the new forecast range out of caution for the considerable increase in forecasts and what could be a deterioration in the macro backdrop in fiscal year 2023, despite encouraging comments on a continued record demand in the United States,” Cowen analyst Andrew Charles wrote in a note Wednesday.
Charles, who has an outperform rating on the stock with a price target of $104, lowered his fiscal 2023 earnings forecast to $3.30 per share from $3.45 and cut his estimate to profits for 2024 while increasing it for 2025.
Analysts also noted that while Starbucks posted bullish numbers for sales and earnings, the company was more cautious about margins. Starbucks said it expects “solid margin expansion in fiscal 2023 with incrementally more expansion in fiscal 2024 and 2025.”
RBC analysts said that while they expect equities to react positively “to this updated algorithm, we see potential for ongoing debate, particularly if macroeconomic and operating conditions do not s ‘not noticeably improve’.
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Starbucks also said it would spend $450 million in fiscal year 2023 to renovate U.S. stores, with “continued investment” over the following two fiscal years. And it announced plans to expand new equipment and technology – such as a redesign of its cold beverage station, automation, new warming ovens and a new cold extraction system – intended to facilitate the staff processing orders.
The company also announced new employee benefits. Starbucks said those benefits include “enhanced sick pay”, extended numerical tips, more flexible hours and “other opportunities to increase overall pay.”
The perks would come as Starbucks tries to head off unionization efforts at several dozen of its stores. The coffee chain has already instituted salary increases and other incentives. But not all, executives said, would go to unionized stores or stores attempting to form a union.
Charles, the Cowen analyst, said in his memo on Wednesday that new union activity “appears to be slowing.” BTIG, in a memo last month, said the number of Starbucks stores filing for union membership per month fell from a high in March as management rolled out wage increases.
Unionization was only briefly mentioned at the investor day, with chief operating officer John Culver referring to unions as “third parties,” a synonym for labor unions commonly used by executives opposed to unionization.
“There are two paths,” Culver said. “We can work together as partners side by side, or we can have a third party between us.”
In depth: Union push at Starbucks, Amazon and Apple could be ‘the most important moment in the American labor movement’ in decades
Starbucks Workers United, the union representing workers at the chain, said the investors’ event “exposed the hypocrisy at the heart of Starbucks”, contrasting the coffee chain’s progressive image with what it called dismissals of workers leading organizing efforts. He also said the workers were “excluded” from the investor event.
“Starbucks is using Investor Day to double down on its anti-union campaign, offering another dose of benefits to non-union workers and falsely claiming they can’t extend those benefits to unionized stores,” the union said in a statement.
Starbucks did not immediately respond to a request for comment on whether new benefits announced Tuesday would go to employees at unionized stores or stores where employees are trying to organize.
Analysts are split on Starbucks stock, with 16 calling it the equivalent of a buy and 16 rating the stock as a reserve, according to FactSet, with a single sell rating. The average price target on Wednesday morning was $95.85. Starbucks shares are down 20.8% so far this year, as the S&P 500 SPX index,