Morgan Stanley downgrades Starbucks due to its China sales growth stumble

Investing

Starbucks’ growth trends will not turnaround anytime soon after the company’s sales guidance reduction, according to Morgan Stanley.

The firm lowered its rating to equal-weight from overweight for Starbucks shares, citing the deteriorating sales growth in China and the U.S.

On Tuesday Starbucks lowered its global third-quarter same store sales growth forecast to 1 percent versus the previous forecast of 3 percent.

“Facing now what is clearly decelerating top-line in its two key markets, SBUX is now saddled with increased EPS risk and a poor recent track record of driving sales,” analyst John Glass said in a note to clients Wednesday. “We see this stock as range bound, at best, near-term as the catalyst for a US comp recovery remains elusive, offset by a valuation that has been compressing over the past 2+ years.”

Starbucks shares are down 3.9 percent in Wednesday’s premarket session.

Glass reduced his price target to $59 from $72 for Starbucks shares, representing 3 percent upside to Tuesday’s close.

The analyst noted how the company’s China same store sales growth is likely to be nearly flat in the third quarter versus 8 percent growth just three quarters ago.

The China sales “deceleration was a negative surprise, and believing in the long-term opportunity in China is important to the long-term thesis. There are some plausible partial explanations for this (a switch away from unsanctioned third party delivery; new arrangements to come by year’s end) but now this is show-me as well,” he said.

In a similar move, Telsey Advisory Group lowered its rating to market perform from outperform and reduced its price target to $60 from $70 for Starbucks shares Tuesday, predicting more mixed sale results in China.

— CNBC’s Michael Bloom contributed to this story.

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