Starbucks sales are 'clearly decelerating'

Stephen Brashear/Getty ImagesStarbucks COO Kevin Johnson introduces the Starbucks Rewards Prepaid Visa Debit Card during the Starbucks Annual Shareholders Meeting on March 23, 2016 in Seattle, Washington. The company also reported on its expansion in China.

Starbucks on Tuesday lowered its third-quarter same-store-sales growth forecast to 1% from its precious estimate of 3%-5%, sending shares plunging 8%. The coffee giant also said it would close roughly 150 underperforming US stores.

While many sell-side research departments remain optimistic, Morgan Stanley took the opportunity to downgrade Starbucks, citing a “clearly decelerating top-line.”

“Starbucks’ 3Q pre-announcement on disappointing sales in both the US and now China are compelling enough to lower our investment rating to EW from OW, especially in light of continued uncertainty in the FY19 EPS outlook and time to recover sales,” analyst John Glass said in a note to clients.

“In addition to cutting our EPS estimates for this year and next, we have downwardly adjusted our base case multiple (25x to 22x) to reflect lower anticipated EPS growth over at least the next year.”

Same-store sales are particularly important for companies like Starbucks that have accumulated a vast retail footprint. Some analysts are worried that the chain may have reached full penetration in the US, making comparable sales all the more important to its continued growth.

Morgan Stanley’s new price target of $US59 is now below Wall Street’s average target price of $US61.72, according to data from Bloomberg, but still 15% above where shares were trading Wednesday.

Elsewhere on Wall Street, the stalling sales were seen as “one step back, two steps forward,” UBS said.

“Despite the reductions, SBUX articulated plans & urgency to accelerate growth through tangible sales drivers & streamlined ops, while keeping LT guidance unchanged,” analyst Dennis Geiger said in a note to clients.

“We expect shares to be down modestly today, w/ support from: a US sss acceleration to 3% in June, low expectations that likely already embedded a guidance reduction, and potential that comps bottomed & could reaccelerate in FY19.”

Starbucks is down 8.84% this year.

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