Starbucks Corp. bet on China for its global growth. But as this country emerges from nearly three years of pandemic shutdowns, the coffee chain’s rebound could face a series of complications, BofA analysts said on Tuesday.
In this context, they said, the more the Chinese consumer is mobile, the better the results will be for the SBUX company,
“Now that China has largely abandoned its zero-COVID policy, [Starbucks] appears poised to benefit from China’s long-awaited economic reopening,” those analysts — Sara Senatore, Jessica Owusu Afari and Katherine Griffin — said in a note. “[T]However, we note that the timing of this tailwind is still uncertain as the economy struggles with policy fallout (weak economic growth, widespread COVID outbreaks).
“We think overall mobility is the metric to watch,” they said.
Analysts said the 3% drop in average unit volumes for Starbucks in China in 2021 from 2019 levels was “virtually identical” to the 3% drop in miles driven over the same period. Same-store sales and mobility had fallen in 2022, they said.
But analysts cited other factors behind the drop in same-store sales in China.
“Despite compelling evidence that Starbucks use occasions (travel, third place) meant he was disproportionately harmed by mobility restrictions, negative [Starbucks] the comps renewed their concerns about local competition,” they said.
Still, analysts said they expect Starbucks’ investments in digital ordering during the pandemic to help. They raised their price target on the company to $125 from $109 and kept their buy rating on the stock.
“[Starbucks’] China’s transitional challenges and pressure on US margins create a particularly attractive buying opportunity, in our view,” they said.
Shares rose 1.4% on Tuesday.
Starbucks’ fourth-quarter operating margins shrank as the chain spent more on higher salaries and on employee training and incentives, William Blair analyst Sharon Zackfia said in a note in November. COVID-19 restrictions imposed by China – as well as similar restrictions in other countries – also weighed on sales. Price increases from Starbucks in North America have offset some of those costs, Zackfia said.
Starbucks raised wages and expanded benefits after more stores across the United States voted to unionize.
Of the 25 analyst ratings on Starbucks stock tracked by FactSet, 14 are holding ratings.