Starbucks Needs Caffeine Boost; Costs Causing Fatigue

Earnings season has claimed yet another victim. Starbucks Corporation (SBUX) released its earnings report this week, with mixed results. Just as for many labor and asset heavy entities, the global specialty coffee chain had its strong domestic sales overshadowed by the elevated commodity costs and staffing shortages caused by the Omicron variant of COVID-19.  

Following the report, analysts themselves remain mixed on Starbuck’s outlook. One of the more neutral voices on the stock is Christopher O’Cull of Stifel Nicolaus, who wrote that the persisting input cost headwinds, Chinese COVID-19 policies, and uncertain margin performance are holding back SBUX’s potential for upside.  

The analyst rated Starbucks a Hold, and assigned a price target of $112. This target suggests a possible 12-month upside of 14.60%.  

In its earnings call, Starbucks reported earnings per share (EPS) below Wall Street consensus estimates. However, the company did manage to see record demand for its food segment, and strong growth regarding its loyalty program memberships.  

In addition to supply side constraints, which raised commodity prices, O’Cull added that “higher than anticipated training and onboarding costs for new partners” have weighed on Starbucks. The difficult labor market is rearing its ugly head considerably as SBUX “continues to compete for talent.” Additionally, quarantine and other disruptions from the widespread Omicron variant have impacted Starbuck’s balance sheet.  

O’Cull was enthusiastic about SBUX’s management intent to pull out all the stops to mitigate these macroeconomic factors, although it will ultimately be up to consumers to digest the increased costs passed onto them. Additionally, minimizing employee turnover in this unstable labor environment will be challenging for management.

Beyond Starbuck’s domestic business, its Chinese footprint has had to deal with an even more intense environment. China’s zero-tolerance COVID-19 policies dramatically disrupted store hours and sales volumes, and the policy, unfortunately, will most likely result in “a longer period of episodic lockdowns relative to the approach employed by most other countries.”  

On TipRanks, SBUX has an analyst rating consensus of Moderate Buy, based on 13 Buy and 12 Hold ratings. The average Starbucks price target is $116.22, reflecting a potential 12-month upside of 20.84%. As of 9:55am Thursday, SBUX was trading at $96.18 per share.  

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