Deutsche Bank downgrades Starbucks stock as customer traffic continues to decline

Deutsche Bank revised its stance on Starbucks Corp (NASDAQ: ) stock on Wednesday, downgrading the coffee giant to “hold” from “buy.” The company also revised its price target on the stock to $89 from $108 previously.

The decision follows Starbucks' fiscal second-quarter earnings report, which suggested challenges are more severe and persistent than the bank expected.

The revision was prompted by what the bank called “challenging F2Q printing,” highlighting that recent performance has raised concerns that the headwinds facing Starbucks are more severe and persistent than previously thought.

The report details a disturbing 7% drop in traffic, the lowest in more than two decades (excluding the period affected by COVID-19). The slump persisted despite the launch of new products such as lavender and spicy fresheners, which did not spur the expected improvement.

Starbucks' woes aren't limited to the United States. The company continues to face a tough market in China, where consumer caution and fierce competition are hurting results. In addition, Starbucks' reduction in unit growth guidance may exacerbate investor concerns about the company's growth trajectory.

Despite these challenges, Deutsche Bank acknowledges that Starbucks is one of the highest quality restaurant companies in the world, with shares trading at multi-year lows. However, with less clarity on when a positive turnaround and earnings growth could occur, the bank believes Starbucks' risk/reward profile is now balanced, leading to changes in the stock rating and price target.

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Investment Professional Insights

As Starbucks Corp. (NASDAQ: SBUX ) grapples with near-term challenges, InvestingPro insights can give investors a clearer picture of the company's financial health and market position. With a market value of US$100.19 billion and a price-to-earnings ratio of 23.69, Starbucks occupies an important position in the industry. The PEG ratio for the trailing twelve months to Q1 2024 was 0.78, indicating that the company's P/E ratio is closely tied to its recent earnings growth. Consider its profitable growth potential.

InvestingPro Tips emphasizes that Starbucks has increased its dividend for 14 consecutive years, reflecting its commitment to shareholder returns. Additionally, the company is recognized as a prominent player in the hotel, restaurant and leisure industries. However, it is worth noting that 16 analysts have lowered earnings for the coming period, which may be a signal that investors should pay close attention to.

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