Starbucks stock faces 20% drop as new CEO’s strategy falters – Jefferies By Investing.com

On Tuesday, Starbucks Corporation (NASDAQ:) received a downgrade in its stock rating from ‘Hold’ to ‘Underperform’ by an analyst at Jefferies, who also lowered the coffee giant’s price target to $76 from the previous $80. The revision reflects concerns over the company’s operational challenges and the anticipated impact on its earnings growth.

The analyst pointed out that while the incoming CEO of Starbucks has indicated a willingness to implement strategic changes, the actual execution of these changes may face obstacles. Key areas such as operations, company culture, customer value perception, and technology require time to improve.

These factors are expected to hinder the company’s financial performance, particularly as the firm predicts low single-digit percentage earnings per share growth for fiscal year 2025, which falls short of the consensus expectations of an 11-12% increase.

The market’s current valuation of Starbucks at 25 times its price-to-earnings (PE) ratio is seen to be at risk of declining towards the 23 times PE ratio common among its industry peers. The analyst’s new price target of $76 is based on a 19 times forward PE ratio for fiscal year 2026, suggesting a potential 20% downside from the current level.

The downgrade comes amid concerns about negative same-store sales (SSS) trends both in the United States and internationally, which are likely to exert pressure on the company’s earnings and valuation multiples. The analyst’s outlook indicates a cautious view of Starbucks’ near-term prospects as the company navigates through its stated challenges.

In other recent news, Starbucks Corporation is witnessing significant developments. BofA Securities raised its price target on Starbucks shares to $118, retaining a Buy rating. This adjustment reflects the firm’s heightened confidence in Starbucks’ operational performance, backed by an expectation of higher steady state comparable store sales growth.

Goldman Sachs reaffirmed its Buy rating on Starbucks, emphasizing the company’s commitment to enhancing customer experience and operational efficiency. TD Cowen and BMO Capital set a price target of $110, expressing confidence in new CEO, Brian Niccol, to drive Starbucks’ growth.

Despite a 6% decrease in North American transactions in the June quarter, analysts expect Starbucks to see earnings growth exceeding 15% over the next three years under Niccol’s guidance.

Starbucks North American CEO, Michael Conway, announced his retirement effective November 30, 2024. The company has yet to announce a successor for the role. This is among the recent developments that the company is navigating through.

As per analysts’ expectations, under the new leadership of Brian Niccol, Starbucks is expected to maintain its growth trajectory and improve operational performance.

InvestingPro Insights

As Starbucks Corporation (NASDAQ:SBUX) faces a downgrade and concerns over its future earnings growth, it’s pertinent to look at the company’s financial health and market performance through the lens of InvestingPro data and tips. Recent data suggests that Starbucks has a market capitalization of approximately $108.2 billion, with a P/E ratio of 26.52, indicating a premium valuation relative to near-term earnings growth. Despite the operational challenges highlighted by analysts, Starbucks has maintained a consistent dividend, increasing it for 14 consecutive years, which may offer some reassurance to investors concerned about immediate returns.

InvestingPro Tips highlight that Starbucks is a prominent player in the Hotels, Restaurants & Leisure industry, and while it operates with a moderate level of debt, its short-term obligations currently exceed its liquid assets. This could be a point of consideration for investors evaluating the company’s ability to navigate through potential financial headwinds. Moreover, analysts predict profitability for the year, and the company has been profitable over the last twelve months, which could be a sign of underlying business resilience.

For those interested in a more comprehensive analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/SBUX. These insights could provide a deeper understanding of Starbucks’ financial position and market dynamics, aiding investors in making more informed decisions.

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