The shares of Starbucks Corporation (NASDAQ: SBUX) rallied yesterday after Jeffrey Bernstein, an analyst at Barclays upgraded the stock’s rating to “overweight,” from “equal weight”, citing menu innovation and impressive customer service. The analyst believes that the company could reap big gains this year. The stock of Starbucks closed at $90.53, up $1.65 or 1.86% from the prior close. Notably, last year, the stock appreciated by 36.5% and outdid its competitors.
Bernstein underlined the Seattle, Washington-based company’s recent efforts to enhance the employee-client relationship in addition to the rising popularity of drink choices such as the Nitro Cold Brew platform. The analyst also highlighted rising digital sales and sustained growth prospects in China and the US. It should be noted that sales in China have rebounded after three-quarters of decline.
In his report, the analyst attributed the stock’s recent gain to efforts put forth by the company to retrain employees, overhaul the Starbucks Rewards program, and launch new drinks such as Pumpkin Cream Cold Brew.
Bernstein acknowledges that Starbucks could face issues in China, such as economic slowdown, stiff competition from Luckin Coffee (LK), and other geopolitical worries. However, the analyst argues that the company is positioning itself as a ‘local brand’ in China by using the country’s designers and contractors for setting up shops. The company is also introducing a new range of products. Recently, Starbucks launched a new beverage series that is made up of milk alternatives produced from a plant.
In the recent past, all business divisions of Starbucks have recorded robust performance. The company continues to report impressive same-store sales growth in the US. More importantly, the growth is fueled by strong business in China. Specifically, in fiscal 2019, Starbucks reported same-store sales growth of 5% in the US and 4% in China. In the final quarter, the same-store sales growth rose by 6% in the US and 5% in China.
Higher transactions and ticket size are expected to lead Starbucks ’ same-store sales growth in fiscal 2020. The company’s transactions and traffic are expected to improve because of an expansion in digital offerings, attractive product range, reward program, and innovation. In addition to higher same-store sales, the unit growth will probably assist Starbucks to improve its top line in fiscal 2020.
The company anticipates opening 2,000 new shops in fiscal 2020. In the US, the company intends to open roughly 600 stores. In China, Starbucks anticipates mid-teen growth.
The company anticipates a slight improvement in its margins in fiscal 2020, aided by favorable cost trends. Furthermore, the management hopes to reduce expenses related to the supply chain in order to boost margins. The favorable price of green coffee is also expected to aid the company’s margins and earnings per share.
On the basis of the above arguments, Barclays analyst Jeffrey Bernstein upwardly revised Starbucks shares from “Equal-weight” to “Overweight,” while revising the price target to $107.00, from $90.00.
Bernstein explained the reason behind his bullish view: “SBUX offers an attractive combination of outsized global fundamental (i.e. comp & unit) growth within both retail and consumer products. The tempering of long-term guidance coupled with the recent fundamental re-acceleration, along with an acknowledged transition towards maturity (i.e. cost management and return of excess cash) leaves us bullishly inclined.”
Notably, a few more analysts have raised their target price for the stock. On Tuesday, Evercore ISI has raised the target price to $95, from $94. Last month, J.P.Morgan upwardly revised the stock from “neutral” to “overweight.”
The upward revision is expected to keep the stock bullish in the short-term.
The historical price chart indicates that the stock is trading above its 50-day moving average. Additionally, the stochastic indicator is in the bullish region. Therefore, we are anticipating the stock to appreciate further in the days to come.
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