Cowen Downgrades Starbucks Due In Part To Poor Sales Of Gift Cards, Craft Coffee

Expectations for Starbucks Corporation SBUX to show a rebound in its business has "diminished," which puts an end to the bullish case for owning the stock, according to Cowen.

The Analyst

Cowen's Andrew Charles downgraded Starbucks from Outperform to Market Perform with a price target lowered from $68 to $65.

The Thesis

Starbucks' outlook has shifted from expectations for a comp rebound in the domestic business and growing financial metrics, Charles said in the downgrade note. Instead, the company will likely show a "deteriorating quality" earnings growth for multiple reasons.

The coffee and restaurant chain saw a "seasonally light" period of gift card activation during the 2017 holiday period, the analyst said in a note. This is a concerning sign as gift card activation has historically been seen as a "leading indicator of the success of loyalty efforts" for the following year.

To counter the poor performance, the company is now broadening its loyalty efforts to better target both new and lapsed brand users. While management could succeed in its initiatives, the timing and magnitude of success remains unknown.

Also, Chrles said the ongoing growth of craft coffee has impacted Starbucks' worsening beverage same store sales problems over the past 18 months. In fact, craft coffee shops are growing at a rate twice as fast as Starbucks and captured around 20 percent of Starbucks' ready-to-drink bottled and canned coffee sales since 2016.

Price Action

Starbucks' stock is trading at a discounted valuation based on historical levels, but the analyst says this is warranted given expectations for at least mid-single digit sales growth and 15 percent-plus EPS growth through 2019.

Shares of Starbucks were trading nearly flat at $59.29 early Friday morning.

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