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BofA raises price target to $125 as China reopens

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Bank of America (BAC) raised its price target on Starbucks (SBUX) stock to $125 from $109 and reiterated a buy rating on the stock to kick off the new year.

Analyst Sara Senatore said the coffee chain’s brand, scale and technology position it for a “strong rebound” and are “poised to benefit” as China abandons its zero- regulated by the government over three years and reopens its economy.

When it fully rebounds will largely depend on China’s economic recovery, she said, but a key metric to watch is people’s mobility after looser COVID rules.

BofA is looking at long-distance travel and “the evidence that people are returning to work, cities are repopulating and consumers are returning to pre-COVID patterns,” Senatore told Yahoo Finance.

Starbucks strengthens its presence in China

SHANGHAI, CHINA - NOVEMBER 9, 2022 - A general view of the Starbucks Intangible Heritage concept store in Shanghai, China on November 9, 2022. (Photo credit should read CFOTO/Future Publishing via Getty Images)

SHANGHAI, CHINA – NOVEMBER 9, 2022 – A general view of the Starbucks Intangible Heritage concept store in Shanghai, China on November 9, 2022. (Photo credit should read CFOTO/Future Publishing via Getty Images)

Throughout the pandemic, Starbucks has grown in China. As of Q4 2022, the Seattle-based giant now has 6,021 locations, up from 4,706 in Q4 2020.

This expansion plan dates back to 2017, when Starbucks purchased about 50% of its licensed stores in mainland China.

Due to this rapid expansion, Starbucks’ operating profits have been hit harder than other restaurant chains, such as McDonald’s (MCD) and Yum! Brands (YUM), Senatore explained in his note. However, Starbucks’ operating profit is expected to reach 60% to 70% of its pre-pandemic levels this year, she said.

Interim CEO Howard Schultz, meanwhile, said he was committed to “playing the long game” in China, according to analysts’ call after the fourth quarter results. He said Starbucks plans to reach 9,000 stores in China by 2025.

“We are confident that when the COVID-related disruptions affecting the country ease, Starbucks will emerge not only as the undisputed leader in our category, but likely as the number one western consumer brand in the country,” he said. declared.

Senatore said Starbucks “will have no problem meeting its long-term goals.”

Mobile orders are key to Starbucks’ growth in China.

In Q4 2022, active Starbucks Rewards members grew 29% from Q4 to more than 17 million members, just below historic levels which Schultz said “coincided with the lifting of restrictions and reflected relevance and underlying strength of the Starbucks brand in China”. .”

As seen in the graphic above, Senatore explained how the COVID-19 lockdowns have impacted Starbucks’ business in China.

“The peak in the second quarter of FY21, in March, was when people felt more confident going out and were cleared to leave their homes. You see the increase in the number of people who have used the app in the last 90 days, but over the same period you see an increase in mobile orders as a percentage of the total,” she said.

She added that mobile orders usually result in a “larger transaction”.

Drops in mobile orders happened when people were “not leaving their homes” (during COVID shutdowns). Mobile orders generated 44% of total orders in Q4 and delivery accounted for 24%.

And as more and more Chinese consumers adopt the morning coffee routine, Starbucks can be considered an “accessible luxury” in China.

“Similar to the United States, Starbucks is considered an accessible luxury for the average consumer at a premium price compared to other listed companies. [in the report: Costa Coffee, Tim Hortons and McCafe].”

Bank of America is one of 14 purchases of Starbucks on Wall Street. There are 20 reservations and 1 sale. On the first day of trading of the new year, Starbucks shares rose just over 1%.

Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email him at bdipalma@yahoofinance.com.

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