Citi trims Starbucks shares, cites growth strategy needs for bullish shift

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On Wednesday, Citi adjusted its outlook for Starbucks Corporation (NASDAQ:), reducing the coffee giant’s price target to $102 from the previous $103 on its shares, while maintaining a Neutral rating on the stock. The firm’s analysis highlighted several factors that could potentially shift its stance to a more bullish view on Starbucks shares.

The firm outlined a series of conditions that could lead to a more optimistic assessment of Starbucks’ stock, including a clear strategy for increasing U.S. same-store sales (SSS), particularly through transaction growth, which would alleviate concerns about earnings before interest and taxes (EBIT) growth and could lead to an expansion of the stock’s multiple.

Additionally, a distinctive plan for the Chinese market, where low-cost competitors have recently proliferated, could represent a positive development for the premium brand. Other factors include identifying growth opportunities beyond China, demonstrating how cost reductions could mitigate revenue weaknesses, and strategies for engaging with shareholders to provide a deeper understanding of decision-makers across business units.

The firm also provided insights into the primary debates among investors regarding Starbucks. These debates focus on the U.S. labor situation, store-level initiatives to increase capacity, the price-value proposition for consumers, the brand’s capacity to navigate a slowdown in U.S. consumer demand, whether cost savings can preserve near-term earnings per share (EPS) outlooks, the impact of competition in China on growth opportunities, and the current valuation of Starbucks shares.

In terms of financial estimates, Citi revised its fiscal year 2024 and 2025 EPS projections for Starbucks to $4.02 and $4.64, down from the previous forecasts of $4.09 and $4.72, respectively. The new price target of $102 is based on a 13.5 times multiple of the firm’s next twelve months (NTM) EBITDA estimate, 12 months from now, and is approximately 0.9 times the relative multiple, aligning with previous valuations.

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