Starbucks (NASDAQ:SBUX) stock has been downgraded to In Line from Outperform by Evercore ISI analysts, citing persistent soft trends in the restaurant sector.
The downgrade comes as part of Evercore's broader 2Q restaurant preview, which highlights decelerating sales and same-store sales (SSS) trends across the industry.
"2Q restaurant trends started soft and decelerated through 2Q," Evercore notes. In early July, U.S. fast food industry SSS trends are said to have continued to deteriorate, falling from June's approximately 1% decline to a 1%-2% range. Evercore said casual dining experienced a similar decline of around 1% in June, with early July trends worsening.
For Starbucks, Evercore says that there are low investor expectations, while the company has an attractive valuation relative to historical averages. However, SSS trends have remained disappointing at -3%.
This is despite favorable factors such as warm weather, multiple product introductions, and limited throughput improvement. "We have been disappointed that SSS trends domestically have seemingly remained at -3%," Evercore states.
The analysts point out that Starbucks appears to be struggling to regain the human connection that once set it apart. Significant investments may be needed to address these issues, including a potential acceleration in the rollout of its Siren stores.
"We believe that Starbucks is struggling to regain the human connection that it was once known for, and that significant investment (e.g., an acceleration in the Siren rollout) could be on the table," Evercore explains.
Moreover, Evercore has lowered domestic calendar 2H SSS estimates for both Starbucks and Yum Brands, and expressed growing concerns about consumer and competitive dynamics in China heading into 2025.
The downgrade reflects Evercore's cautious outlook on the sector as they adjust sales forecasts and lower EPS estimates for multiple fast food names amidst ongoing industry challenges.