Shares of iconic Seattle-based coffee chain Starbucks (SBUX) have been tumbling steadily lower in recent months, thanks in part to an unforgiving environment that’s seen inflation, higher labor costs, competitive pressures, and unionization attempts.
Let’s also not forget the effect of Omicron, weak comparables in China, and the potential for further COVID variants to continue weighing down the firm’s recovery trajectory.
Indeed, the list of concerns is growing, but Starbucks is such a powerful brand that it will likely shine through the current haze of concerns. It’s one of the most influential brands out there, and it’s this strength that will allow Starbucks to raise prices without backlash and continue its long-term growth in the Chinese market.
Still, Starbucks is more of a consumer discretionary play in the quick-serve restaurant space. For that reason, the stock could be more vulnerable than its peers should a recession be on the horizon.
Could a Recession Spell Trouble for Starbucks Stock?
The inverted U.S. yield curve is one of the most popular recession signals that have been touted in the headlines of late.
With the flattening yield curve at risk of inverting in 2022, investors may be inclined to throw in the towel on their discretionaries like Starbucks ahead of time. Undoubtedly, a recession with high inflation levels sounds like a horrifying combination.
While the yield curve could invert and signal a recession, Credit Suisse recently noted that any such inversion could be a “false positive” this time around, given unique attributes of the current environment as the economy continues its pandemic recovery.
Despite Starbucks’ greater sensitivity to the state of the economy (premium coffee just doesn’t sell as well when times are tough), I remain bullish on SBUX stock. The long-term narrative has not changed as much as the valuation amid the stock’s fall into bear-market territory.
SBUX Stock: Short-Term Pain for Long-Term Gain?
Starbucks is fresh off an underwhelming result that saw comparable-store sales in China plunge 14%. On the surface, it was pretty discouraging to see the firm’s top growth market sag on a year-over-year basis.
Indeed, China is supposed to be a significant grower for Starbucks moving forward. Despite the weakness, I think the recent sales fumble should be viewed as more of a blip than the start of a sustained trend lower.
Consumer trends don’t change that quickly. The quarter was weighed down heavily by COVID-19-induced measures that should subside as Omicron cases dwindle. Although it seems like the U.S. market is ready to move on to a more “normal” type of environment, China is still very much proceeding through the late innings of this pandemic with caution, using lockdowns to curb the spread.
Eventually, the pandemic will go endemic, and Starbucks will heat up again, both in China and in the Americas. In the meantime, Starbucks has done an incredible job of bolstering its loyalty program. Indeed, complicated drink orders are made much easier through the firm’s polished mobile app. I’d look for the firm to leverage its innovative talents to drive visit frequency and per-visit spending.
Though there are no easy ways around recent headwinds, from supply-chain woes to upward wage pressures, I ultimately believe that the Starbucks brand is resilient enough to shrug off such stresses moving into year’s end. Starbucks is a premium brand in the coffee scene, and it should have the pricing power to pass on its higher costs to its users in due time.
Wall Street’s Take
Turning to Wall Street, SBUX stock comes in as a Moderate Buy. Out of 24 analyst ratings, 13 Buys and 11 Holds were assigned in the past three months.
The average Starbucks price target is $116.22, implying an upside potential of 28.5%. Analyst price targets range from a low of $100.00 per share to a high of $136.00 per share.
The Bottom Line on Starbucks Stock
Starbucks finds itself in an unenviable position between COVID-19 lockdowns and high inflation. It’s tough to gauge when recent headwinds will go away. That’s probably a major reason why many analysts have Hold recommendations on the name currently. Regardless, Starbucks stands out to me as one of the more attractive reopening plays out there.
As Starbucks preserves through recent headwinds, expect the firm to explore tech-driven initiatives that could leave a long-lasting positive impact on operating margins. From its digital app to increased automation in the drink-making process, it’s hard to dismiss Starbucks’ long-term potential just because it’s been caught on the wrong side of uncontrollable exogenous events.
The China growth story still seems intact. It’s just been pulled back by continued macro issues. Pending a prolonged recession, I view Starbucks as an enticing value play after what’s truly been a “perfect storm” of headwinds.
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