Analyst Note| Sean Dunlop |
Investors have quickly taken note of a bleak intra-quarter report from wide-moat Yum China Sept. 14, sending wide-moat Starbucks' shares down 4% as they contemplate the coffee chain's exposure to the region. Yum China's management indicated that the sustained spread of the delta variant has resulted in piecemeal closures across 16 (of 23) Chinese provinces, with the firm anticipating a 50%-60% decline in quarterly operating profit, attributable to deleverage and rising input costs. We urge investors not to read too deeply into these headlines, with a number of differences between the firms, hedged commodity prices through at least mid-2022 for Starbucks, and geographic diversification blunting the impact of near-term pressures. We maintain our fair value estimate of $109 per share, with the stock trading in a range we consider fairly valued.