Now that China is planning to ease its COVID-19 restrictions, many companies in the U.S. also stand to gain. Among them is Starbucks (NASDAQ:SBUX), which was hurting from persistent lockdowns.
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Starbucks is still in the nascent stages of expansion in China and expects to operate 9,000 stores across China by 2025. The company aims to achieve this by opening one store every nine hours in the country for the next three years. Even now, Starbucks has significant exposure in China currently, with more than 6,000 stores in the country.
China’s zero-COVID policy has been heavily impacting the company’s international revenues and other metrics. International revenues in its recent quarter declined 7% year-over-year due to a 5% plunge in comparable store sales owing to the restrictions in China. Not only that, but the lockdowns also led to a 750 basis-point contraction in its operating margin. Overall, revenues from China were down 20% year-over-year during the quarter.
With the stock down more than 15% year-to-date, the easing of restrictions can give it a much-needed boost as travel to and from China opens up a little more, and local traffic to Starbucks stores increases. Traffic momentum is expected to build from here.
BTIG analyst Peter Saleh expects Starbucks’ same-store sales in China to surge remarkably as a result of pent-up demand once the restrictions ease. He believes that this, coupled with the new-store-every-nine-hours strategy, should “unlock significant earnings power as the year progresses and into FY24.”
Is SBUX Stock a Buy, Sell, or Hold?
Peter Saleh maintained his bullishness on SBUX stock with a Buy rating and price target of $110. Other than that, trading at 27.5x forward earnings (two years out), Starbucks looks reasonably valued relative to its decade-high P/E of 97.6x.
Wall Street is cautiously optimistic, though, with a Moderate Buy consensus estimate based on 13 Buys and 10 Holds. The average SBUX price target of $100.35 indicates a 2.5% upside potential to the current price level.
Takeaway: Starbucks is on a Solid Trajectory
Easing of China restrictions means more people on the roads, in offices, and in institutions. It also means more business, more pent-up demand, and hence more footfall to Starbucks’ 6,000 stores in China. This creates a solid upside to stock prices. Given that the momentum is expected to build from here, this seems like a good time to make an investment in the shares.
