3 Long-Term Concerns For Starbucks' Business

Analysts at Stephens acknowledge that Starbucks Corporation SBUX remains one of the few consumer brands in existence that can consistently grow its square footage and same-store sales — but this alone isn't sufficient reason to buy shares of the java giant. 

Stephens' Will Slabaugh maintains an Equal-Weight on Starbucks' stock with a price target lowered from $58 to $52 heading into the coffee chain's fourth quarter for three primary reasons.

• The retail environment continues to suffer from slowing foot traffic, which will naturally impact any brand with a "significant" brick-and-mortar presence, including Starbucks, the analyst said. 
• Starbucks' business has benefited over many years from its "food innovation and technology engines," but this has now stalled and created a throughput issue. In fact, any fixes that the company implements to address throughput issues could hurt its margins, according to Stephens. 
• At some point in the long run, Starbucks will experience a slowing percentage growth rate of new store openings in the U.S., Slabaugh said. This will, over time, likely weigh on the company's revenue growth and the stock's valuation, he added. 

"We present the previous arguments around retail traffic, throughput, innovation and unit growth simply to reflect our growing concern that a 'reset' of the company's growth formula may not be fully anticipated by the market," Slabaugh said. "While we continue to view Starbucks as one of the highest quality restaurant/retailers in the world, we believe the stock is now trading at a higher multiple relative to its future level of EPS growth."

Bottom line, Starbucks' stock is trading at 23.9x its 2018 expected EPS, which is expected to rise just 11 percent from 2017 levels. This represents a higher valuation versus prior years, when it was supported by a 20 percent EPS growth rate — so a 20x to 22x multiple is "more appropriate" to reflect a 10-to-15-percent EPS growth profile moving forward.

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