Why Goldman Removed Starbucks From Its 'Conviction List'

In a report published Wednesday, Goldman Sachs analyst Karen Holthouse removed shares of Starbucks Corporation (NASDAQ: SBUX) from its ‘Americas Conviction List' but retained a Buy rating with a $57 price target, noting that there are other stocks with greater upside potential.

Since being added to the Conviction List on December 7, 2014, shares of Starbucks has risen 28 percent versus a 1 percent decline in the S&P 500. It has outpaced the Consumer Discretionary SPDR (ETF) (NYSE: XLY), which gained 6 percent over the same time period.

Concurrent with the report, Holthouse initiated coverage of Bloomin' Brands Inc (NASDAQ: BLMN) with a Buy rating and added the name to the Conviction List.

Nevertheless, Holthouse reiterated her view that the fundamental bullish thesis on Starbucks remains given a confidence in the mobile opportunity and new food innovations.

Related Link: Starbucks Hits Its Stride In The Digital Age

Mobile Is Working

Holthouse noted that store checks and consumer feedback suggest that mobile ordering is working. The analyst is expecting a growing awareness of mobile ordering to drive improved sentiment around traffic, with benefits ramping as mobile ordering shifts from initial trials in Portland to higher density markets such as New York City.

Food As A Contributor

Holthouse noted that food has already added two percentage points to Starbucks' domestic comp figures. According to the analyst's survey, customers are showing a "growing acceptance" of food items, especially lunch items with a 50 percent improvement in customer attitude.

Holthouse added that further food product innovation and increased attachment rates will drive further upside and food can move closer to a 3 percent comp contributor.

Valuation

Despite a run up in share prices over the past year (30 percent plus return versus a flat S&P performance), Holthouse pointed out that shares of Starbucks are currently trading near-low P/E valuation versus the restaurant industry.