Starbucks Corporation (NASDAQ:SBUX) is getting a lot of attention over the past couple of days, but it’s for all the wrong reasons. SBUX stock is up nearly 75% over the past two years, but at least one analyst is saying that the stock is due for a pullback.
On Tuesday, Deutsche Bank analyst Brett Levy downgraded SBUX stock from “Buy” to “Hold” and cut his price target from $70.00 to $64.00. (Source: “Starbucks’ new loyalty program greeted with a stock selloff,” MarketWatch, April 12, 2016.) The new price target is eight percent above SBUX stock’s current price.
Levy cited concerns that the recent changes to the Starbucks loyalty program, which came into effect on Tuesday, may hurt customer traffic. Shares fell as much as 4.2% Tuesday on the news, which is the most the stock has fallen in more than two months. (Source: “Starbucks Declines on Concern About Loyalty-Program Backlash,” Bloomberg, April 12, 2016.)
Starbucks recently changed its loyalty program to reward customers based on dollars spent rather than the number of purchases made, much to the dismay of many Starbucks loyalty members. In February, though, Starbucks said in a conference call that the “vast majority” of customers would earn points just as fast or even faster than before, while a “small minority” wouldn’t earn rewards as fast as before. (Source: MarketWatch, op cit.)
“The April 12 loyalty-program changeover could result in modest disruptions to U.S. near-term traffic and sales trends, in our opinion,” Levy said. “We do not welcome this potential added risk to the story.” (Source: Bloomberg, op cit.)
Starbucks’ loyalty program has been a big part of the coffee chain’s growth strategy in recent years and it has proven to be incredibly successful.
When Starbucks introduced its app that came integrated with a mobile payment system and loyalty card, it was well ahead of its rivals, as the app immediately caught on with customers. The app and its loyalty program now account for about 21% of all U.S. transactions and they’re still gaining steam. (Source: “Mobile means more bucks for Starbucks,” Mobile Strategies 360, January 26, 2016.)
In Starbucks’ most recent earnings call, the coffee chain added that it is seeing further acceleration and that the number of customers that use the app to pay for coffee could reach the mid-20% range in the current quarter. (Source: “Starbucks a ‘Top Pick’ Offering a Latte Upside,” Barron’s, March 28, 2016.)
Why does the loyalty program matter so much to Starbucks? It locks in customers to spending money in a Starbucks store by offering free food and beverages. Loyal customers also spend more. According to Starbucks, customers who pay with the Starbucks app on a mobile device spend three times more than customers who don’t. (Source: Ibid.)
So is this bad news for Starbucks?
Probably not—at least not in the long term. In the short term, there might be some peeved off customers who will revolt and try out other coffee shops in protest. But they’ll come back; they always do, especially if they are really loyal to the coffee chain. Otherwise, why did they have the loyalty card in the first place?
The Bottom Line on SBUX Stock
Levy downgraded SBUX stock to “Hold” and not to “Sell.” That’s because Starbucks is still a great company. The stock may be overvalued at the moment, though, sporting a forward price-to-earnings ratio of 27.49. Investors might want to wait for a bit of a pull back before considering Starbucks stock.