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The Ratings Game: Starbucks stock jumps after bigger profit promised, but analysts have doubts about ‘almost shockingly good’ targets

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Shares of Starbucks Corp. rallied on Wednesday after the company rolled out ambitious new sales and profit targets, but Wall Street analysts cautioned that the new goals could be too optimistic.

Starbucks
SBUX,
+5.53%

executives, in connection with an Investor Day presentation on Tuesday afternoon, said it expected yearly same-store sales growth of 7% to 9% from fiscal 2023 to fiscal 2025, up from an earlier range of 4% to 5%, with a big rebound in China following COVID-19-related lockdowns. The giant coffee chain’s executives said they expected 10% to 12% yearly global revenue growth over that time, also up from prior expectations, with adjusted annual earnings per share growth of 15% to 20%.

For more: Starbucks to open 3,000 new stores in China despite falling sales from COVID lockdowns

The targets showed “‘Ambition’ (with an !),” JPMorgan analysts said in a research note Wednesday that characterized executives’ guidance as “the optimistic side of realistic.” BTIG analysts described the forecasts as “almost shockingly good,” leaving them “both impressed and slightly curious” while noting possible investor skepticism amid concerns about macroeconomic issues.

At least 11 analysts increased their price targets on the stock in response to the presentation and one upgraded 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 familiar profit forecast.

“An EPS growth rate of 15-20% over F23-F25 was given, coincidentally matching the growth rate blessed at the December 2016 analyst day that later had to be lowered twice as ambitious store growth, comp, and margin targets had to be reined in over the next 18 months,” JPMorgan analysts wrote, while maintaining an overweight rating and increasing their price target to $100 from $92.

“We prefer to model near the low end of the new guidance range out of conservatism for the considerable increase in guidance and what could be a deteriorating macro backdrop in fiscal 2023, despite encouraging commentary about record demand holding up in the U.S.,” Cowen analyst Andrew Charles wrote in a note on Wednesday.

Charles, who has an outperform rating on the stock with a $104 price target, lowered his fiscal 2023 earnings forecast to $3.30 a share from $3.45 and trimmed his earnings estimate for 2024 while raising it for 2025.

Analysts also noted that while Starbucks served up bullish numbers for sales and profit, the company was more circumspect on margins. Starbucks said it expected “solid margin expansion in fiscal 2023 with progressively more expansion in fiscal 2024 and fiscal 2025.”

RBC analysts said that while they expected shares to react positively “to this updated algorithm, we do see potential for ongoing debate, particularly if macro and operating conditions don’t materially improve.”

See also: New Starbucks CEO has ‘deep’ knowledge of the consumer but lacks restaurant experience

Starbucks also said it would spend $450 million in fiscal 2023 to overhaul U.S. stores, with “continued investment” in the two fiscal years after. 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 make it easier for staff to handle orders.

The company also announced new benefits for employees. Starbucks said those benefits included “enhanced” sick pay, expanded digital tipping, more flexible hours and “other opportunities to increase overall pay.”

Those benefits would arrive as Starbucks tries to head off unionization efforts at several dozen of its stores. The coffee chain has already instituted pay hikes and other incentives. But not all of them, executives have said, would go to unionized stores or stores attempting for form a union.

Charles, the Cowen analyst, said in his note Wednesday that new union activity “appears to be slowing.” BTIG, in a note last month, said the number of Starbucks stores filing for unionization per month had fallen from a peak in March, as management rolls out pay increases.

Unionization came up only briefly during the investor day, with Chief Operating Officer John Culver referring to unions as “a third party,” a synonym for unions used commonly by executives opposed to organizing.

“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: Unions’ push at Starbucks, Amazon and Apple could be ‘most significant moment in the American labor movement’ in decades

Starbucks Workers United, the union representing the chain’s workers, said the investor event “exposed the hypocrisy at Starbucks’ core,” contrasting the coffee chain’s progressive image with what it said were firings of workers leading organizing efforts. It also said workers were “shut out of” the investor event.

“Starbucks is using Investor Day to double down on their union-busting campaign, offering another dose of benefits for nonunion workers and falsely claiming that they can not extend these benefits to union stores,” the union said in a statement.

Starbucks did not immediately respond to a request for comment on whether the 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 a hold, according to FactSet, with just one sell rating. The average price target as of Wednesday morning was $95.85. Starbucks shares have declined 20.8% so far this year, as the S&P 500 index
SPX,
+0.34%

has fallen 17.5%.

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