Baird downgrades Starbucks, says China among growing list of risks along with omicron, rising costs

Published Fri, Dec 17 20216:40 AM ESTUpdated Fri, Dec 17 20216:56 AM EST

Baird on Friday downgraded shares of Starbucks as concerns brew about growth in China and near-term risks in the U.S. "We remain optimistic about the company's long-term fundamental outlook, but we are moving to a less constructive near-term investment recommendation due to an increasingly uncertain backdrop for the China business, which when combined with some other risk factors that could linger for the balance of F2022, makes us less bullish on the setup for the shares at current valuation metrics," Baird's David Tarantino said. Baird lowered its rating on Starbucks to neutral from outperform. The firm also cut its price target on the stock to $116 per share from $126. The new projection is 2% higher than Starbucks' closing price Thursday. Starbucks made negative headlines in Chinese media recently, Baird cited. The report in a state-backed newspaper show Starbucks used expired ingredients at two locations and an investigation found operational and health issues at more than a dozen other locations, Baird noted. Starbucks apologized and announced training and inspections for its China stores following the reports. "While this type of situation likely would be viewed as fairly benign in the U.S., history would suggest Chinese consumers could react fairly negatively, leading to greater-than-expected pressure on near-term sales performance in China," Tarantino said. China only makes up 13% of the fiscal year 2021 revenue of Starbucks but is a long-term growth opportunity for the company, according to Baird. "As such, while China does not have as much influence on near-term EPS estimates as the U.S., it does have an impact on how investors think about the overall growth profile of SBUX," Tarantino said. When taken into account the current environment of rising Covid cases in the U.S. and persistently high prices, the risk backdrop appears greater, Baird said. "We fear that any indications of brand-specific issues in this market could create some anxiety among investors when considering the company also faces other risks (Omicron, potential for cost pressures to intensify) and the stock still trades at a premium valuation," Tarantino said. Starbucks has underperformed the market this year, up 6.2% compared with the S & P 500's 24% gain. Shares slumped more than 1% in premarket trading Friday. —CNBC's Michael Bloom contributed reporting.

A customer exits a Starbucks in Buffalo, New York, U.S., December 7, 2021.

Lindsay DeDario | Reuters

Baird on Friday downgraded shares of Starbucks as concerns brew about growth in China and near-term risks in the U.S.