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Starbucks Corp. has banked on China for global growth. But as that country emerges from nearly three years of pandemic lockdowns, the coffee chain’s rebound could run up against an array of complications, BofA analysts said on Tuesday.
Against that backdrop, they said, the more mobile the consumer in China, the better the results will be for the company
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“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]hough we note that the timing of this tailwind is still uncertain as the economy struggles with the fallout of policies (weak economic growth, widespread COVID outbreaks).”
“We believe overall mobility is the metric to watch,” they said.
The analysts said that the 3% dip in Starbucks’ average unit volumes in China in 2021 compared with 2019 levels was “virtually identical” to the 3% decrease in kilometers driven over that same period. Both same-store sales and mobility had fallen in 2022, they said.
But the analysts cited other factors behind the weaker same-store sales in China.
“Despite convincing evidence that Starbucks’ use occasions (commuting, third place) meant that it has been hurt disproportionately by mobility restrictions, negative [Starbucks] comps have renewed concerns about local competition,” they said.
Still, the analysts said they expected Starbucks’ investments in digital ordering during the pandemic to help. They hiked their price target on the company to $125 from $109 and kept their buy rating on the stock.
“[Starbucks’] transitory China challenges and U.S. margin pressure create a particularly attractive buying opportunity, in our view,” they said.
Shares were up 1.4% on Tuesday.
Starbucks’ operating margins in its fourth quarter thinned as the chain spent more on higher wages and on employee training and incentives, William Blair analyst Sharon Zackfia said in a note in November. China’s COVID-19 restrictions — along with similar restrictions in other nations — also weighed on sales. Starbucks’ price increases in North America have offset some of those costs, Zackfia said.
Starbucks has hiked wages and expanded benefits after more stores in the U.S. voted to unionize.
Of the 25 analysts’ ratings on Starbucks shares tracked by FactSet, 14 are hold ratings.
