Jefferies analysts have issued a rare sell-equivalent rating for Starbucks Corp., suggesting that the company’s turnaround prospects remain uncertain despite a new chief executive officer.
Andy Barish, a Jefferies analyst, expressed concerns about Starbucks’ ability to execute necessary strategic changes, following the appointment of Brian Niccol, formerly of Chipotle Mexican Grill Inc., as CEO.
Barish lowered his price target for Starbucks to $76, which implies a 20% decline from its current price of $95.48.
Stock surge may be overdone
Starbucks shares surged 24% following Niccol’s appointment in August.
However, Barish believes this rally is “overdone,” noting that key issues such as operations, company culture, and value perception will take time to address. In a research note, Barish said,
While the new CEO suggests necessary strategic change is now on the table, we believe execution will be challenged as issues like ops, culture, value perception and tech take time to fix.
He also pointed out that technological improvements would be crucial but challenging.
Underperform rating only one of two sell-equivalents
No sooner than the leadership change was announced last month, analysts had rushed to upgrade Starbucks.
Baird upgraded the coffeehouse chain to ‘Outperform’, raising its price target for the stock to $110 a share, citing a more favourable risk-reward following the hiring of Niccol.
“While we acknowledge continued near-term risks related to the external operating environment, we believe Niccol brings a skill set that will prove valuable in strengthening internal operating fundamentals for the company,” Baird said.
Several other research firms, including TD Cowen and Piper Sandler, also lifted their rating on Starbuck’s shares.
Against this optimism, Barish’s underperform rating-one of only two sell-equivalent ratings-makes it a rare stance.
Challenges for Starbucks and expectations from Niccol
Starbucks has struggled to combat declining sales as customers push back against higher-priced offerings.
With shares still in negative territory for the year, Barish cautioned that the path to recovery is far from straightforward, projecting a tough year ahead for the coffee giant.
Starbucks announced Niccol as its chairman and CEO last month, officially highlighting his contribution to Chipotle’s growth.
It said that since becoming CEO in 2018, Chipotle’s revenue under Niccol nearly doubled while profits increased nearly sevenfold, and the stock price increased by nearly 800% during his leadership.
This happened along with increases in wages for retail team members, expanding benefits, and strengthening the culture, it said.
However, experts have apprehended that turning around Starbucks would be a more challenging endeavour for Niccol.
“At Chipotle, Niccol streamlined store operations to shorten wait times, beefed up marketing and lured customers back with limited-time menu items. Remaking Starbucks could be much more difficult. It has many more stores and varying challenges around the world, including low-cost competitors in China and ongoing boycotts in the Middle East,” AP said in a report earlier this month.
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