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The Ratings Game: Starbucks downgraded after returning CEO Schultz halts share buybacks, but focus on workers amid unionizing efforts gets support

Wedbush analysts downgraded Starbucks Corp. stock to neutral from outperform, saying returning Chief Executive Howard Schultz’s decision to halt share buybacks could hurt profit.

Wedbush cut its price target to $91 from $105.

Starbucks had set a goal to return $20 billion to shareholders over the next three years, including buybacks and dividends.

“We now believe a discount is appropriate given a lower earnings per share growth outlook with the termination of Starbucks’ share repurchase authorization adding to declining visibility into the performance of Starbucks’ International and U.S. businesses,” analysts wrote.

In a March 17 note, Wedbush raised an alarm about risk to earnings per share from COVID-related challenges and the momentum behind unionization, which could drive up labor costs.

In the Tuesday note, Wedbush added that the share buyback program also served as a “cushion” for any hit resulting from investments to address the headwinds the coffee company faces. With share buybacks off the table, analysts say they no longer have high conviction that the company will return to low-double digit EPS growth in fiscal 2023.

Starbucks
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announced last month that Chief Executive Kevin Johnson would retire and Schultz, the company’s founder and former CEO, would fill the role on an interim basis during the search for a permanent replacement.

See: Starbucks CEO stepping down with Howard Schultz returning on an interim basis and pay of $1

On his first day back in the corner office, Schultz announced that he would suspend share buybacks in order to invest in workers and stores, which would benefit everyone, including investors, in the long run.

“My first work is to spend lots of time with partners,” Schultz wrote in a letter posted on the Starbucks website.

“Our vision is to once again reimagine a first-of-a-kind for-purpose company in which the value we create ­— for each of us as partners, for each of us as customers, for our communities, for the planet, for shareholders — comes because our company is designed to share success with each of us and for the collective success of all our stakeholders. ” 

Schultz spoke to 15,000 employees on Monday at an “Open Forum” where he promised to “do better for our partners” and revamp the customer experience as guests are using the cafes in different ways.

He said NFTs and the “evolution” of employee benefits are in the works.

Schultz also directly addressed the issue of unionization. A Seattle location voted to unionize last month, and a New York City Reserve Roastery voted in favor of unionization on Friday. Nine Starbucks-owned restaurants have voted to unionize, according to the New York Post.

Also: Opinion: Starbucks CEO gets a $60 million ‘golden goodbye’ even as company tries to keep out unions

“[M]y job in coming back to Starbucks, is to ensure the fact that we, the collective we, co-create, reimagine a new Starbucks with our partners at the center of it all,” he said at the Open Forum.

“As a pro-partner company. A company that does not need someone in between us and our people.”

RBC Capital Markets had a different view of the buyback suspension, saying it will afford Starbucks with greater flexibility to achieve its goals, and the signal that it sends about Schultz’s intentions is a strong one.

“[P]articularly in the context of current unionization efforts across a number of stores (though still representing a very small portion of Starbucks’ ~9,000 U.S. company-owned stores), the move is also a clear message that Schultz is willing to take bold steps during his time as CEO,” analysts wrote in a note.

RBC anticipates that Starbucks will spend on training and wages for workers, as well as technology and store growth.

RBC rates Starbucks shares sector perform.

Don’t miss: Here’s how a greener Starbucks will reward you for reusing your cup

MKM Partners also expressed optimism regarding Schultz’s vision over the longer term.

“This letter creates a format to begin re-evaluating its priorities, and potentially help Starbucks refocus on driving organic growth and returns, in order to better reward its partners and shareholders, in our view,” wrote MKM Partners in a note.

“Although additional bumps in the road remain possible for Starbucks (domestic macro; China marketplace; operational/labor challenges; inflation; and strategic uncertainty), and we accept the potential for additional margin pressures related
to investments around structural moves and/or stepped-up store-level expenses, we continue to rate Starbucks shares buy with an inched-lower price target of $115, from $117.”

MKM notes that most of the plans are still to be determined, but calls this buyback suspension a “modest course correction.” For now analysts say they are leaving their model unchanged.

“We do not know what dynamics are in play or if any items or initiatives are untouchable, but we believe with Starbucks’ founder helming these
discussions, the dialogue should prove to be robust and likely receive significant backing from the board to drive change,” analysts said.

Starbucks shares slumped 4.3% in Tuesday trading, and have fallen nearly 28% for the year to date.

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