Deutsche Bank has updated its outlook on Starbucks Corporation (NASDAQ: NASDAQ:SBUX), increasing the price target to $120 from $118, while reiterating a Buy rating on the shares.
The firm's analyst pointed out that Starbucks pre-released its fourth-quarter results, which were below expectations, but suggested that this move might be strategic.
By releasing the disappointing figures ahead of the full earnings report on October 30, Starbucks could be aiming to shift the focus towards the company's long-term prospects.
The analyst noted that the suspension of Starbucks' FY25 guidance was anticipated and is likely intended to provide the new CEO, Brian Niccol, with the leeway to make investments and seek input from the new leadership team.
Starbucks has already implemented some changes, and Niccol is expected to elaborate on his initial observations and priorities during next week's earnings call. A more comprehensive strategy for a turnaround is likely to be presented in early 2025.
Despite the less-than-stellar quarterly results, the analyst believes that investors who are bullish on the company will overlook the short-term setbacks and concentrate on Starbucks' potential for long-term earnings.
In other recent news, Starbucks reported a decrease in global comparable store sales by 7% and a 3% decline in consolidated net revenues to $9.1 billion in its fiscal fourth quarter. The company also saw a 25% drop in GAAP earnings per share to $0.80 compared to the previous year. Despite these figures, the company's Board of Directors approved an increase in the quarterly cash dividend from $0.57 to $0.61 per share.
Starbucks' new CEO, Brian Niccol, is addressing concerns from baristas and customers demanding improvements, with issues ranging from understaffing and inadequate pay to the quality of coffee. Analyst Sharon Zackfia from William Blair anticipates that Niccol's strategy may involve increasing labor hours at stores.
Starbucks has also announced a strategic shift under new leadership and has suspended its guidance for the fiscal year 2025. BTIG maintained a Buy rating on Starbucks, citing confidence in the new CEO's industry experience. However, Jefferies downgraded Starbucks' stock rating from 'Hold' to 'Underperform', citing operational challenges.
Starbucks is expanding its global coffee research efforts with the addition of two new coffee innovation farms in Guatemala and Costa Rica. The company has also been part of escalating labor union actions across the United States, with employees holding strikes over staffing issues.
InvestingPro Insights
To complement Deutsche Bank's analysis, InvestingPro data offers additional insights into Starbucks' financial position. Despite recent challenges, Starbucks maintains a substantial market capitalization of $109.72 billion, underscoring its dominant position in the coffee industry. The company's P/E ratio of 27.09 suggests that investors are still willing to pay a premium for its shares, possibly due to its growth potential and market leadership.
InvestingPro Tips highlight Starbucks' commitment to shareholder returns, noting that the company "has raised its dividend for 14 consecutive years" and "has maintained dividend payments for 15 consecutive years." This consistent dividend policy aligns with the analyst's view of Starbucks as a high-quality growth company, potentially attracting long-term investors despite short-term setbacks.
However, it's worth noting that "7 analysts have revised their earnings downwards for the upcoming period," which may reflect the pre-released disappointing Q4 results mentioned in the article. This could explain why Starbucks is currently "trading at a high P/E ratio relative to near-term earnings growth."
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for Starbucks, providing a deeper understanding of the company's financial health and market position.
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