This note was originally published January 10, 2014 at 14:21 in Restaurants
It was not too long ago that the success of Starbucks and Whole Foods Market was linked to the “higher end” consumer, particularly when compared to their counterparts McDonald’s and Walmart. Accordingly, both SBUX and WFM have been strong performers, as the “higher end consumer” has proven to be much more resilient in a stagnant economy than others.
With another downgrade today, the street has turned decidedly negative on WFM. We offer no opinion on the stock at this time, but a negative outlook could suggest that “higher end” consumers are starting to feel the pinch. If this plays out and WFM sees same-store sales growth begin to slow, we have reason to believe the same could happen at SBUX.
The tepid jobs number reported earlier today is also concerning and, on the margin, bearish for SBUX. We continue to believe street estimates are too high for SBUX and with 78% of analysts having a “buy” rating on the stock (versus only 50% for WFM), sentiment could be peaking. After being one of the biggest fans of SBUX over the past 5 years, we see plenty of reason to be cautious on the stock in the early stages of 2014.
Editor's note: This is an excerpt from a recent report issued by Hedgeye Restaurants Analyst Howard Penney. He added SBUX to Investing Ideas on 7/18/13 and held it to 12/18/13 netting subscribers over 12% versus a 6% return for the S&P 500. Penney thinks Starbucks remains a great company with a strong and feasible long-term strategy. That said, he expects SBUX to adjust accordingly to slower revenue growth in the early innings of 2014.
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