Starbucks is a buy at BofA with margin concerns called overdone
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Bank of America thinks the concerns of margins degrading at Starbucks Corporation (NASDAQ:SBUX
+1.9%) amid labor inflation and the unionization push are overdone.
The firm reiterated a Buy rating on SBUX, noting the coffee chain operator still benefits from a strong U.S. business, which contributes 80% of EBITDA and tailwinds from growth in loyalty membership and a resilient retail business.
On wage growth concerns: "Wages have paced industry... Given that the industry is generally anticipating MSD wage inflation as it laps COVID related step-ups (in 2H22 and 1H23), an equivalent increase for SBUX would amount to ~$450 mm. We believe Starbucksâ announced +$200 mm additional spend in F22 makes progress toward that goal (including wages, training, equipment and tech), suggesting incremental wage investments in F23 in the ~$300 mm range."
On unionization concerns: "Given that SBUX already pays ahead of the industry, we see the risk from unionization as reputational in nature. While declines in consumer favorability have followed increases in media coverage of the unionization push, they have been modest and temporary in nature."
On margins: "Starbucks restaurant level EBITDA margins are among the best in the industry, but highly consistent with the companyâs positioning as a market share leader in its segment. Restaurants that â for all intents and purposes -- operate in a market of one tend toward mid-20s EBITDA margins, irrespective of industry."
Wall Street ratings on SBUX are evenly split between buy and hold with 17 Buy-equivalent or higher ratings stacking up 17 Neutral-equivalent ratings.