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Starbucks Initiated With a Buy at MKM Partners

MKM Partners initiates coverage of Starbucks with a buy rating and a $105 price target.
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MKM Partners initiated coverage of Starbucks (SBUX) - Get Free Report with a buy rating and a $105 price target, but warned that the coffee retailing giant's near-term operations may suffer due to "China-related concerns."

Shares were up modestly Thursday to $89.13.

"We believe the company possesses a unique long-term mix supporting the build-out of a dominant global business (~31,000 Starbucks locations, significant channel-related points of distribution), strong in-store operations and ongoing investments in its supply chain and considerable digital infrastructure," analyst Brett Levy said in a note to clients.

Levy said the Seattle-based company has been able to balance "its envied in-store position with its role as one of the most forward thinking digital players across the restaurant landscape and continued efforts to move quickly through its '100 day idea toaction' approach."

Last month, Starbucks said fiscal first-quarter net income rose 21% on 7% higher revenue; the results topped analysts' expectations. However, the company said that it closed more than half its stores in China due to the outbreak of the coronavirus.

Levy said Starbucks' China market ended fiscal first quarter 2020 with nearly 4,300 units and around $3 billion of company sales, representing over half of international company-operated revenue.

The company affirmed its outlook for fiscal 2020, excluding the potential impact from China, but said it would "update its guidance for fiscal 2020 when we can reasonably estimate the impact of the coronavirus."

"Depending on the duration and magnitude of the ongoing health crisis, we believe there could be an EPS hit measuring in the nickels or dimes, if this persisted over the coming quarters," Levy said. "If this impacts Starbucks’ ability to successfully open its planned ~+600 new units targeted for China landscape in fiscal 2020, this could weigh on results beyond this year, as new/non-comp stores represent 80% of revenue growth."