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The Ratings Game: Starbucks makes it harder to get free coffee, but changes to rewards program should boost profit and sales

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The changes Starbucks Corp. is making to its rewards program, which will take effect February 13, will mean members have to spend more to get free hot coffee, lattes and cold brews. They should also help boost the coffee giant’s profit and sales this year, Stifel Nicolaus analyst Chris O’Cull said.

O’Cull raised his price target on Starbucks’
SBUX,
-0.79%

stock on Monday to $117 from $93 but maintained the hold rating he’s had on the stock since October 2021. The new price target makes O’Cull the most upbeat of the 19 of 34 analysts surveyed by FactSet who aren’t bullish on the stock.

He believes that when Starbucks reports first-quarter U.S. same-restaurant sales (SRS), or sales of stores open at least 13 months, that figure will rise 12% from a year ago, which would handily beat the average analyst estimate compiled by FactSet of 8.5%.

Not only has the number of transactions at Starbucks restaurants been increasing post-COVID, O’Cull said, but the key driver to higher “comps” (comparable-, or same-restaurant sales) has been the increase in the size of the average transaction.

“The U.S. comp has benefited from several factors boosting the ticket average, including price increases, more beverage modifications, greater food attachment and continued growth in cold beverages,” O’Cull wrote in a note to clients.

He believes the higher average check amount, along with the upcoming changes to Starbucks Rewards, should increase investor confidence in the company.

The stock, which fell 0.7% in midday trading Monday, has run up 24.3% over the past three months. In comparison, the Consumer Discretionary Select Sector SPDR exchange-traded fund
XLY,
-0.82%

has edged up 1.2% the past three months, and the S&P 500
SPX,
-0.78%

has gained 3.7%.

O’Cull believes the changes to the rewards program will increase fiscal 2023 U.S. SRS by 1% to 3%, leading him to lift his full-year growth estimate to 11% from 10%.

He also raised his estimates for fiscal 2023 earnings per share by 4.4%, to $3.55 from $3.40, and for revenue by 2%, to $36.82 billion.

Starbucks unveiled the changes to its rewards program in an email to members on Dec. 28.

“While the number of stars required for a few items — liked packaged coffee and iced brews (not to be confused with cold brew) — are reduced, we doubt these particular items drove much of the redemption volume,” O’Cull wrote. “The more impactful changes include a 100% increase (100 stars from 50 stars) in the required stars for hot brewed coffee, tea or a bakery item, and a 33% increase (to 200 stars from 150 stars) for handcrafted beverages (i.e., lattes, cold brews, etc.), hot breakfast items and packaged snacks.”

He also noted that stars required to redeem a packaged salad, sandwich item or protein box jumped 50%, to 300 stars from 200 stars.

While the changes might be good for Starbucks profit and sales numbers, the changes were not well received by many Starbucks Rewards members, as evidenced by some tweets:

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