Starbucks' Price Target May Have Been Ground Down, But The Future Remains Bold

RBC Capital Markets slashed its price objective on Starbucks Corporation (NASDAQ: SBUX) from $68 to $64 to reflect lower SSS growth expectations in fiscal year 2017. However, the firm maintains its Outperform rating on the stock, and the revised price tag offers about 20 percent upside potential from the current levels.

As the company is slated to announce its earnings results on November 3, analyst David Palmer expects Starbucks to deliver 5 percent growth in SSS for the fourth quarter based on its consumer panel analysis until September that implied 4–6 percent uptick.

Similarly, the brokerage maintains its EPS expectation of $0.55 for the fourth quarter representing 28 percent year-over-year growth.

Related Link: JAB Holdings Thinks It Could Compete With Starbucks

However, the firm revised down its EPS estimates for the fiscal year 2017 from $2.15 to $2.13, while SSS growth rate has been reduced from 5 percent to 4.5 percent. The revision comes on the slowdown in incremental sales momentum from MyStarbucks Rewards digital.

RBC cited the following four key factors for reaching its EPS estimates for fiscal year 2017:

• Expected lower growth of SSS compared to an estimated 6.3 percent in fiscal year 2016.
• Possible savings from reduced spending on technology following the MO&P launch.
• Increased savings from supply chain compared to the fiscal year 2016.
• "Another heavy year of partner wage step-up."

"We also believe Yum China's digital success ($1 billion in cashless payment sales representing 20 percent of total sales, with >64 million loyalty members in less than one year) is a positive read-through for Starbucks. We hope to hear about initial adoption results during the upcoming earnings call," the brokerage said in a research note.

At last check, Starbucks traded at $53.10, up 0.93 percent on the day.

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