Starbucks Served A Grande Upgrade, Long-Term Targets Expected To Improve

Starbucks Corporation SBUX was upgraded by Wedbush on Friday ahead of expected revisions to the company’s long-term guidance and the possibility of revenue growth from 1,300 stores the company is purchasing in China.

A Wedbush check of 5 percent of co-owned Starbucks locations in the U.S. shows single-store sales growth in line with the fourth-quarter consensus of 3.5 percent, analyst Nick Setyan said in a note.

Mobile ordering and pay are being cited more often as a “meaningful” comp driver, according to Wedbush.

The research firm is modeling a 3-percent comp number for U.S. stores in Q4, “but based on our checks we view a rounded-up 4 percent U.S. comp as realistic should this trend continue through September,” Setyan said.

Wedbush upgraded Starbucks from Neutral to Outperform and raised its price target from $57 to $60.

Starbucks Expected To Clear ‘Psychological Hurdle’

A lower annual EPS growth rate of 12–17 percent is “increasingly baked into consensus expectations,” Setyan said.

“We expect this psychological hurdle to be removed in October, along with incremental visibility into near-term drivers of comp and margin” (see his track record here).

Once the coffee retailer’s long-term guidance is revised, Wedbush projects its stock will “reclaim a premium” to large-cap consumer growth peers tracking with a slightly higher EPS growth rate.

JV Acquisition Pending

Starbucks has declined to share details about its pending purchase of 1,300 stores in China for $1.3 billion, Setyan said.

Wedbush estimates the addition to the company’s portfolio could add 100 basis points of incremental revenue growth in fiscal 2018 and 1–2 percent incremental EPS growth in fiscal 2019.

The stores are located in Shanghai, Jiangsu and Zhejiang provinces, according to Starbucks. China is Starbucks’ fastest-growing market outside of the U.S., and CEO Kevin Johnson said the company is committed to operating more than 5,000 stores in the country by 2021.

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