Starbucks (SBUX) stock slipped after it was downgraded by Goldman Sachs due to fears over its China business. It comes after Apple (AAPL) shares plunged on the news weakness in the world’s second biggest economy was harming iPhone sales.
Goldman Sachs analyst Karen Holthouse said she was reducing the stock to neutral from buy due to “incremental China concerns and valuation.” She also cut her price target to 68 from 75. Holthouse pointed out both Apple and McDonald’s (MCD) are experiencing weakness in the region.
Increasing local competition from Chinese chains like Luckin is another threat for Starbucks stock, especially as the one-party state is ramping up nationalist sentiment amid the ongoing trade spat with the U.S.
“SBUX has more openly acknowledged the impact of local competition in the region, and Luckin has been at the forefront of investor concerns,” the analyst said in a research note. “Press reports regarding Luckin’s growth targets suggest a significantly accelerating threat in 2019 that SBUX’s own efforts around delivery may struggle to counteract.”
Starbucks stock was down 2.6% at 62.53 on the stock market today, retreating sharply from its 50-day average after hitting resistance there in recent weeks. In that time, the relative strength line has also nose-dived.
China Exposure For Starbucks Stock
China is the centerpiece of the coffee giant’s expansion plans. Last May, Starbucks said it planned to ramp up store openings to 600 annually, with a view to having 6,000 cafes in the country. It currently has 3,600 cafe’s in the country.
But last month Starbucks stock was hit after management said same-store sales growth in China could be as low as 1% in the long term. This figure is well below the 3%-4% growth seen for the U.S. and the rest of the world. In the fiscal year that ended in September, Starbucks reported Chinese same-store sales growth of 2%.
But in addition to the local competition Starbucks is facing, China also has been struggling for growth. Sources have told Reuters the communist regime is getting set to cut its economic growth target for 2019 to 6% to 6.5%, compared to 2018’s target of 6.5%.
The country is said to be reeling from a double whammy of weakening domestic demand and higher U.S. tariffs. However there is currently cautious optimism on trade, with talks between China and the U.S. said to be going well.
Yum Brands Cut, Texas Roadhouse Upped
Separate from its China warning, Goldman Sachs also commented on other stocks in the restaurant sector
Goldman Sachs also downgraded Taco Bell parent Yum Brands (YUM) to sell from neutral and cut the price target to 76 from 83.
Holthouse noted Yum stock is trading at a peak multiple relative to the group, increasing labor costs, comScore data showing Pizza Hut’s continued sales deceleration, and signs that Taco Bell is cutting back on aggressive promotions.
Yum stock was down 1.7% to 90.21.
Meanwhile, Goldman Sachs upgraded Texas Roadhouse (TXRH) to buy and hiked its price target to 72 from 64. A number of factors were cited for the move, including optimism that lower-end consumers will be spending more in 2019, partially due to the tax cuts and also due to expected rising wages.
Texas Roadhouse stock rallied 2.8% to 66.14.
YOU WILL ALSO LIKE: