Starbucks Stock Declines After Jefferies Downgrade to Sell, Citing Overdone CEO-Fueled Rally

Shares of Starbucks Corporation experienced a decline in pre-market trading on Tuesday after Jefferies downgraded its rating on the coffee giant to “underperform” from “hold.” This decision followed a significant rally in the stock, which was attributed to the appointment of new CEO Brian Niccol. Jefferies expressed concerns that the recent stock price surge has been “overdone,” given the operational challenges Starbucks faces.

The downgrade has caused investors to reevaluate the stock’s valuation amid increasing uncertainties. Jefferies analysts acknowledged that while Niccol’s leadership and strategic changes have been positively received, the stock’s nearly 27% rise since his appointment may have come too soon, especially considering ongoing operational and cultural issues within the company.

The analysts stated, “We find this gain to be too much too soon when very little is known about Mr. Niccol’s plans so early in his tenure.” They emphasized that the company’s size, complexity, and global reach—particularly regarding its operations in China—suggest that any turnaround will take considerable time and investment.

Jefferies also raised concerns about Starbucks’ valuation, noting that it is currently trading at 25 times forward earnings, which is significantly higher than peers like McDonald’s and Yum! Brands, who trade at approximately 23.5 times forward price-to-earnings ratios. Analysts believe Starbucks’ premium valuation is unwarranted based on its lower expected growth trajectory, advocating for a valuation aligned with the industry average of 21 times two-year forward earnings.

The report anticipated that guidance for fiscal 2025 could be disappointing, projecting low single-digit EPS growth compared to the consensus estimate of 11-12%. Additionally, Jefferies forecasts a 4% decline in same-store sales in the U.S., with international markets—including China—facing similar challenges due to a tough macroeconomic environment.

Consequently, Jefferies reduced its price target for Starbucks from $80 to $76, indicating a potential 20% downside from current levels. While praising Niccol’s leadership skills, the analysts cautioned that his task of turning around Starbucks would be more complicated and prolonged compared to his success at Chipotle Mexican Grill.

Starbucks is currently contending with significant issues, such as operational inefficiencies, cultural hurdles, and a declining perception of value among consumers, predominantly in the U.S. The analysts believe these issues will take time to resolve and could negatively impact Starbucks’ near-term performance.

Jefferies commented on the upcoming earnings report, predicting a disappointing fourth-quarter EPS and indicating that the business appears unresponsive even to the popular Pumpkin Spice Latte launch. They also highlighted that forthcoming announcements regarding fiscal 2024 results and fiscal 2025 guidance could further contribute to uncertainty, with fiscal 2025 potentially seen as a year focused on reinvestment and stability rather than growth.

The brokerage suggested that Starbucks may need to reassess its long-term growth projections, particularly in the U.S. and China. They believe the current 7% global unit growth target is at risk and suggest that a more attainable target might be closer to 5%, accompanied by low single-digit same-store sales growth. Furthermore, Jefferies views the company’s goal of 15%+ long-term EPS growth as unrealistic, advocating for a more modest target of 10-12%.

Despite an initial positive market response to the leadership transition, Jefferies’ downgrade and cautious outlook highlight the difficult path ahead for Starbucks. Following the recent stock rally, the company now faces increased scrutiny as investors consider the challenges of stabilizing and expanding the business. Jefferies’ price target of $76 reflects significant downside potential, indicating that without signs of improvement in Starbucks’ fundamentals, the stock may struggle to regain momentum. The stock was trading 1.7% lower in pre-market activity on Tuesday.