Starbucks Corporation (NASDAQ:SBUX)'s shares took a hit on Tuesday, underperforming the S&P 500's 0.6% decline with a drop of 2.4%. The downturn comes in the wake of a rating downgrade by TD Cowen, driven by apprehensions about potential difficulties in the company's operations in China.
TD Cowen analyst, Andrew Charles, revised his evaluation of Starbucks' shares from Outperform to Market Perform on Tuesday. He also reduced his price target from $117 to $107, primarily due to concerns that complications in China could significantly affect Starbucks' stock performance in the near future.
Charles highlighted that Starbucks' business narrative for investors would be heavily influenced by China's situation. He cited increased competition in Starbucks' second biggest market as lower-cost alternatives are swiftly gaining a larger market share.
In addition to competition, China is currently navigating an economic downturn following the pandemic, which has put financial strain on consumers. This could potentially deter them from purchasing discretionary items such as those offered by Starbucks. Charles suggested that the market is overestimating the revenue Starbucks is expected to generate from China in the coming three years. He forecasts a gradual increase in same-store sales until they return to their 2019 levels.
Despite these challenges, Starbucks continues to implement its successful U.S. strategies such as digital ordering, offering iced beverages, and drive-through services in China. However, Charles argued that these improvements wouldn't significantly impact the stock due to investor focus on China.
The coffee giant has been heavily investing in China over recent years with an ambitious plan to operate 9,000 outlets in the country by 2025. This would mean opening a new store every nine hours for the next three years. Currently, Starbucks operates slightly more than 6,400 stores in China, marking a 12% increase from last year.
Analysts have grown increasingly cautious about Starbucks over the past year. Current data shows that 37% of analysts rate the stock as Buy and 63% hold ratings, a shift from a year ago when 47% were bullish and 53% held ratings.
The company's stock has decreased by 4.2% this year, lagging behind the index's 16% gain.
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