As it prepares to report fiscal third quarter earnings after the market closes on Tuesday, it has a lot to live up to.
Over the past 12 months, Starbucks stock (ticker: SBUX) is up 64.1%, compared to 36.3% in the
Quo Vadis Capital analyst John Zolidis remains “very optimistic about the Starbucks brand, management and the company’s long-term growth prospects.” But he also admits that “with the stock trading at record highs, and multiplying at several decades, it still seems true on the face of it that now is not the best time to grant a position in Starbucks stock.” join or settle.”
Starbucks has reaped the benefits of the economic reopening. Same-store sales in the US grew 9% year-over-year in March, while same-store sales in China rose 91%, although Zolidis acknowledges that China had a low benchmark due to tighter restrictions earlier during the pandemic.
Consumer enthusiasm for the brand remains relatively unaffected by the pandemic. Starbucks continued to see year-over-year increases in active loyalty program members in the US, with the exception of the third quarter last year, notes Zolidis.
During Tuesday’s earnings call, investors will also be eager to hear about management’s plans to buy back shares. Since Starbucks paused buybacks in 2020, Zolidis notes that the impact of past buybacks has faded and earnings per share growth now more closely matches net income growth. He expects the company to resume share buybacks by the end of the year.
Starbucks investors are also well aware of rising labor costs, an industry-wide problem, but Zolidis says the market will look beyond “provided revenue growth is robust enough.”
While Zolidis remains optimistic about Starbucks’ business, a potential slowdown in earnings growth is a “greater risk” that could lead to “several years of multiple contraction, which occurred the last time Starbucks traded at similar valuations.” He is not rated for Starbucks stock.
However, Stifel analyst Chris O’Cull has a buy recommendation for the stock with a 12-month price target of $135.
“Starbucks is a pioneer among retail and restaurant companies in dealing with changes in consumer behavior caused by demographic shifts and technological disruptions,” writes O’Cull. He adds, “[W]I believe management is taking the right steps to help Starbucks emerge stronger than before.”
Starbucks shares are down 0.5% in recent trading, while the S&P 500 index is up 0.1%.
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