Starbucks stock faced a decline on Tuesday following TD Cowen’s downgrade of the stock. Analyst Andrew Charles expressed concerns about the cafe chain’s Chinese operations and their potential challenges.

Charles downgraded Starbucks stock (SBUX) from Outperform to Market Perform, and adjusted the price target from $117 to $107. He attributed his downgrade to the likelihood of China-related issues significantly impacting the stock’s performance in the near future.

In a note to clients on Tuesday, Charles emphasized that China has become a focal point for Starbucks’ investor narrative, and highlighted several headwinds that the company faces.

Firstly, Starbucks faces intensifying competition in its second-largest market, with cheaper alternatives rapidly gaining market share.

Additionally, amidst the macroeconomic slump caused by the pandemic, China’s consumers are experiencing economic pressures that discourage discretionary spending, such as purchasing Starbucks products. Charles argued that the broader market is overestimating Starbucks’ revenue generation in China over the next three years, and he believes that same-store sales will experience a “slow climb” in order to reach 2019 levels.

Furthermore, Charles emphasized that China is still in its formative stages regarding coffee-shop habits, which differ from the more mature and established U.S. market.

Overall, Starbucks must overcome these challenges and navigate their Chinese operations strategically in order to maintain growth and succeed in this pivotal market.

Starbucks Reports Strong Growth in China

In the latest quarter, Starbucks reported an impressive 51% increase in revenue in China compared to the previous year. Additionally, same-store sales saw a significant boost, rising by 46%.

As part of its strategic expansion plan, Starbucks has made a substantial investment in China over the past few years. The company aims to establish a staggering 9,000 stores in the country by 2025. As of now, Starbucks already operates over 6,400 stores in China, marking a 12% increase from last year.

While the company continues to prioritize its digital ordering, iced beverages, and drive-through services in the United States, its focus on these areas is unlikely to impact stock performance. This is because investors are predominantly interested in Starbucks’ progress and growth in China.

Analysts have become increasingly cautious about Starbucks’ future prospects. According to a recent FactSet poll, only 37% of analysts rate the stock as a Buy, while 63% have assigned it a Hold rating. A year ago, the sentiment was more positive with 47% of analysts being bullish on the stock.

On Tuesday, Starbucks stock experienced a 1.8% decline, while the S&P 500 was slightly down by 0.3%. Year-to-date, Starbucks shares have declined by 4.2%, significantly underperforming the index’s impressive gain of 16%.

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