What happened
Shares of Starbucks (SBUX 1.05%) were down by 4.5% as of 12:50 p.m. ET Friday -- and you can pin some of the blame on investment bank R.W. Baird.
So what
On Friday morning, Baird analyst David Tarantino downgraded Starbucks from outperform to neutral, and cut his price target on the shares by $10 to $116, StreetInsider.com reports.
Although Tarantino remains "optimistic about the company's long-term fundamental outlook," in the near term, he worries that the "backdrop for the China business [looks] increasingly uncertain" -- presumably referring to that nation's efforts to contain the omicron variant of COVID-19 through lockdown measures.
Image source: Getty Images.
Now what
In fact, China has already been dragging on Starbucks' business lately. In the company's earnings report for its fiscal fourth quarter, which ended Oct. 3, management noted that "China comparable store sales decreased 7%, driven by a 5% decline in average ticket and a 2% decline in transactions" -- and I have to say, that is worrisome.
Earlier in the year, a rebounding Chinese economy helped Starbucks grow its in-country same-store sales by 17% -- mostly from increased foot traffic. Its gains, though, were mitigated by a 2% decrease in ticket size.
What does this mean for investors? Well, consider: If it is the pandemic and its related lockdowns that are slowing down the coffee giant's sales in China, you'd expect to see foot traffic fall -- but ticket size would likely hold steady or rise, as the customers who do come into its stores would buy the same products as usual or more. If ticket size is decreasing, though, this suggests a waning in the actual popularity of Starbucks' offerings in China, because even loyal customers are spending a bit less when they come into its stores.
Suffice it to say this is a yellow flag for the business -- and a good reason for Starbucks stock to be going down Friday.
