The Ratings Game: ‘Too good to be true?’ Starbucks tops expectations but analysts question sustainability of its growth


As Starbucks’ stock was bumped up 5% in pre-market trading on Friday after posting record fourth quarter revenue that beat expectations, analysts were still skeptical whether the coffee chain can keep

Starbucks reported worldwide same-store sales increase of 7% but international same-store sales fell 5%, and even more in China, which saw a 16% drop. Executives also said unfavorable foreign exchange headwinds hit net revenue by 2%.

Rating Starbucks

at market perform, Bernstein’s Danilo Gargiulo questioned whether Starbucks’s results and guidance were “too good to be true.”

He said increasing economic pressure could lead consumers to reduce consumption, and a reliance on customization poses risks to meeting same-store sales guidance.

Many stocks in Beijing have been rallying on the hope for the relaxing of COVID-19 rules.

UBS analysts kept their neutral rating as they praised the drink chain’s “increasing strong digital penetration and a solid new product pipeline” as positives, but added that “a likely uneven China recovery and potential pressure on U.S. consumer spending power represent risks.”

North American same-store sales growth of 11% was driven mostly by price rises though transactions also rose 1%. “Elevated average check wasdriven by pricing (~+6%) and food attach, as well as increased demand forpremium beverages and personalization,” said RBC Capital Markets’ Christopher Carril.

He highlighted management’s “ultrasensitivity” around the zero-COVID policy in China admitted by Chief Executive Howard Schultz, which the team priced into its targets.

“We see shares as likely range-bound near-term, and thus remain sector perform. Our price target changes slightly to $88 (from $87) on our revised estimates,” Carril said.

Citi research analysts, led by Jon Tower, said it was hard to argue with the business’s momentum, particularly its international growth. He agreed with Carril over the potential risks, but added that geopolitical tensions could also impact “the strength of the brand in China.”

He rated Starbucks neutral, minutely raising the price target from $90 to $93 a share.

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