Jefferies sees balanced risk/reward in Starbucks, cuts to Hold

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By Senad Karaahmetovic

Jefferies analysts downgraded Starbucks (NASDAQ:SBUX) stock to Hold from Buy as they see a more balanced risk/reward in the coffee chain operator.

The analysts acknowledge that Starbucks stock is up more than 40% since year-to-date (YTD) lows in May, vastly outperforming the S&P 500 (-2.8%). They made the downgrade move despite admitting it is hard to find a large-cap stock that offers 15–20% EPS growth.

"The risk/reward now appears balanced following investments into the biz and growth concerns earlier this year," the analysts wrote in a note.

Moreover, they cut U.S. same-store sales (SSS) estimates, citing a challenging macroeconomic environment.

"Although we believe in SSS drivers in the U.S. business supported by partners, equipment, and tech, we are concerned about the potential incremental risk to recession in the 2HC23/1HC24 impacting Starbucks "discretionary" spend from some customers (pm daypart). We lower our U.S. SSS ests to account for this via negative transaction growth, although it may come in the form of softer avg check as well, which has been significant in the form of price, premiumization, cold, and modifiers," the analysts further clarified in a client note.

They are especially concerned about the back end of 2023 and 2024 as Starbucks may have "some flex for F23," partially fueled by the reopening in China.

"We suspect the stock will tread water for some time," the analysts concluded.

Starbucks stock is down over 1% Wednesday.