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Starbucks poised for growth despite trimming long-term guidance, analysts say

Starbucks Corp. is making the right moves to drive growth despite concerns of cannibalization from newly announced U.S. delivery, headwinds in China and a cut in long-term guidance that sent the coffee retailer's stock down following its Dec. 13 investor day, analysts said following the meeting.

During the conference, Starbucks announced plans to roll out delivery to some company-owned U.S. stores, the expansion of a partnership with Alibaba Group Holding Ltd. in China and expected earnings growth in fiscal years 2020 and 2021 from a licensing deal with Nestlé SA.

But analysts later pointed to executive remarks about trimming longer-term guidance at the company, targeting a global same-store sales growth of 3% to 4% — down from a previously forecast range of 3% to 5% — and adjusted EPS growth of at least 10% from previous forecasts of at least 12%.

Starbucks stock fell as much as 4.2% after executives announced the new long-term guidance. Share price recovered slightly by midday Dec. 14 but was still down by 2.7% to $65.13 per share.

The revised guidance, however, was a prudent move for Starbucks that "likely caught the market by surprise" after strong fiscal fourth-quarter sales growth in the U.S. and China, BMO Capital Markets analyst Andrew Strelzik said in a late Dec. 13 note to clients.

The trim also reflects a more mature company positioned toward "growth at scale," Barclays analyst Jeffrey Bernstein said in a Dec. 14 research note praising the decision to cut guidance.

"After all, actual results will overshadow guidance and a consistent beat and raise on lower guidance is much preferred," Bernstein said.

Analysts also commented on Starbucks' partnership with Uber Technologies Inc.'s UberEats to offer delivery at up to a quarter of its 8,575 company-operated U.S. stores in 2019.

Investor excitement around delivery at other companies, heavy Starbucks store density in urban markets and a more affluent customer all position Starbucks well for delivery, Goldman Sachs analyst Karen Holthouse wrote in a Dec. 14 note.

However, BTIG analyst Peter Saleh wrote in a Dec. 14 research note that while the average delivery check is about 2.5 to three times larger than the average in-store check, the service poses a risk of cannibalizing existing sales, and Starbucks is not getting access to customer-level data from UberEats.

"We believe the only viable solution to the cannibalization issue will be to raise delivery prices to offset the third-party commission, making delivery margins comparable to that of an in-store purchase and not generating a headwind," Saleh wrote.

Cannibalization is also a concern in China, where Starbucks is rapidly growing its store count and expanding delivery options. The company also faces challenges from competition and a slowing Chinese economy, analysts said.

But a partnership with Alibaba on delivery and a virtual store offering drinks, food and merchandise through smartphone app orders "unlocks new growth avenues and the brand's ongoing connection with younger Chinese professionals," Morningstar Sector Strategist R.J. Hottovy said in a Dec. 14 note.