Starbucks sales forecast raises questions about China, U.S. growth

(Reuters) – Starbucks Corp (SBUX.O) shares fell 4 percent on Wednesday after a dim sales forecast from the U.S. coffee chain prompted Wall Street analysts to question the sustainability of its growth at home and next biggest market China.

FILE PHOTO: A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California, U.S. on October 27, 2015. REUTERS/Lucy Nicholson/File Photo

Several analysts downgraded their ratings and cut their 12-month targets on Starbucks’ stock, after the company on Tuesday forecast sales growth at established restaurants to rise by just 1 percent in the third quarter, below Wall Street expectations of a 3 percent increase.

Starbucks also expects same-store sales in China to see no growth in the three months ending June.

With Wednesday’s decline, Starbucks’ shares were on track to enter negative territory for 2018 – a year in which well regarded Chief Executive Officer Howard Schultz stepped down and the company found itself at the center of an embarrassing racial profiling incident.

Morgan Stanley analyst John Glass, who downgraded the stock to “equal-weight” from “overweight,” expressed surprise at Starbucks’ expectations for China, and said the overall forecast raised questions about the sustainability of Starbucks’ growth back home. Just three quarters ago, same-restaurant sales in China had risen 8 percent, Glass noted.

Other analysts echoed Glass’ surprise, noting that the Seattle-based company had been upbeat about growth in China just a few weeks ago at its investor day event, saying it was highly focused on that market.

Wells Fargo’s Bonnie Herzog said the forecast for China was the most discouraging, “putting a damper on some of the optimism we came away with after visiting China last month.”

On Tuesday, Starbucks also announced plans to close some 150 U.S. cafes and open much fewer locations in fiscal year 2019, a result of intensifying competition that has seen new coffee chains, convenience stores and fast-food chains improve quality and cut prices aggressively.

Analysts also pointed to lower-than-expected same-restaurant sales in five of the previous six quarters at Starbucks’ Americas business that is dominated by its roughly 8,000 U.S. cafes.

Some analysts said a sharper focus on digital initiatives – promoting Starbucks’ mobile app and online ordering – could make up for some of the slowdown in the company’s key markets.

“In reaction to what is now a clearer pattern of slower U.S. sales, more product and digital innovation is in the works, but it’s hard to see how much that impacts sales,” Morgan Stanley’s Glass said.

Morgan Stanley’s downgrade on Starbucks’ shares brings the total number of “hold” or equivalent ratings on the stock to 15. Still, 16 analysts maintain a “buy” or higher rating.

The average Wall Street price target on Starbucks shares was $62.08. The stock dipped 3.7 percent to $55.28 before the bell on Wednesday.

Reporting by Nivedita Balu in Bengaluru; Editing by Sai Sachin Ravikumar

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