Investors have reason to be "less fearful" of Starbucks ' outlook following the release of the company's latest quarterly report, according to Evercore ISI. Analyst David Palmer upgraded shares of Starbucks to outperform from in line, saying in a Wednesday note to clients that the coffee chain's outlook is better than feared, even as it continues to face several challenges around Covid lockdowns in China and a growing union push in its stores. "Over the next two quarters, investors will need to look past ugly China results (SSS [same store sales] declines down 50%+ in April) and stepped up reinvestment (roughly $600m F2H22) in wages and training," Palmer wrote. "However, by the September investor day and the Fall appointment of a new CEO, Starbucks will likely be able to share some stabilization in China trends, ongoing improvement in US SSS and a plan to improve throughput and capacity," he continued. Evercore ISI maintained its price target of $95 per share, representing nearly 28% upside from Tuesday's closing price. Shares of Starbucks are down 36% year to date. The analyst call comes on the back of Starbucks' most-recent earnings report that largely met expectations. On Tuesday, the coffee chain suspended its fiscal year outlook amid ongoing Covid lockdowns in China, but noted strong domestic demand helped offset declines in international sales. "From the earnings call and our discussions, we believe expensed investment will be relatively modest when compared to this year's $1 billion and the nearly 300bp of inflation impact to US margins (roughly $700m-$800m)," analysts wrote. "In our view, this reduces the odds of our $70 downside scenario (see page 2) and paves the way for a solid recovery path." Shares of Starbucks jumped more than 5% in Wednesday premarket trading. —CNBC's Michael Bloom contributed to this report.
People walk past a Starbucks in Buffalo, New York, December 7, 2021.
Lindsay DeDario | Reuters
Investors have reason to be "less fearful" of Starbucks' outlook following the release of the company's latest quarterly report, according to Evercore ISI.