Starbucks still hot on China despite muted sales

By Yashaswini Swamynathan

(Reuters) - Tepid growth in Asia might have taken some steam out of Starbucks Corp's latest quarterly sales, but both the company and analysts remain upbeat about the coffee chain's prospects in China.

Starbucks has been investing heavily in the world's most populous country despite signs of cooling economic growth, and Chief Executive Howard Schultz said on Thursday that business in the country had never been stronger.

"We believe one day (China) could very well be larger than the U.S. business," Schultz said on a post-earnings call.

Analysts said muted sales in the quarter were a blip. China is Starbucks' largest market outside the United States.

While comparable sales were muted in China in the latest quarter, Starbucks' return on investment on its newest stores has strengthened, Cowen & Co analyst Andrew Charles noted.

This, he said, is a more important indicator of the company's growth prospects in China.

Starbucks, whose shares were down 0.6 percent at midday on Friday, reported a 5 percent rise in comparable sales in the Asia-Pacific region in its first quarter ended Dec. 27.

Analysts had expected a rise of 6.1 percent, according to research firm Consensus Metrix.

Starbucks does not break out China sales.

Investor expectations are high for Starbucks, whose sales have risen at double-digit percentage rates for almost two years, so its shares get hit at the slightest sign of trouble.

The stock fell as much as 5 percent after-hours on Thursday after the release of the results and a second-quarter earnings forecast that fell short of market expectations.

EXPENSIVE STOCK

Starbucks' stock, which was trading at $58.65 on Friday, is far more expensive than peers, trading at 29.81 times forward 12-month earnings, according to Thomson Reuters data.

That compares with a median 23.61 in a sector that includes McDonald's Corp and Dunkin' Brands Group Inc .

Still, analysts said it was a good time to buy Starbucks.

"I recommend buying on the dip; not many restaurants can boast 8 percent comps, nearly 20 percent adjusted operating margins and 15 percent EPS growth. Who does that?" Argus Research analyst John Staszak said in an email to Reuters.

None of the 27 brokerages covering the company recommend selling the stock, and the median price target is $69, well above current levels, according to Thomson Reuters data.

While Starbucks shares have risen 24 percent over the last 200 days, on Friday they came close to slipping below their 200-day moving average price for the first time in 15 years.

This suggests the stock is cheaper than it has been for most of the past year.

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Graphic: Starbucks share performance vs. peers (http://bit.ly/1S97TP6)

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(Reporting by Yashaswini Swamynathan in Bengaluru; Additional reporting by Ankit Ajmera and Ramkumar Iyer; Editing by Sayantani Ghosh and Ted Kerr)