U.S. markets closed

For Starbucks, the Near-Term Isn't All Doom and Gloom

Madeleine Johnson

Across the country this week, coffee giant Starbucks (SBUX) is beginning to reopen its U.S. stores after closing the majority of its roughly 10,000 locations in March due to social distancing and stay-at-home rules.

But like many things these days, visiting your local Starbucks is going to be a different experience for a while.

Stores won’t have seating options, and few customers will be allowed to enter at a time. The company is encouraging customers to use delivery or mobile order and pay options to get their coffee fix, so that both employees and patrons can still easily practice social distancing.

Here in Chicago, I noticed the Starbucks stores in my neighborhood utilizing the “entryway handoff” method. With this, customers can avoid going into a store and still get their afternoon latte. Starbucks is also working on implementing curbside pick-up.

Earnings Impact

Starbucks’ recent fiscal second quarter was challenging, to say the least.

Same-store sales plunged 10% because of lower customer traffic, while its international business dropped 31%. Q2 revenue was down 5% and earnings sank 47% year-over-year.

Management also pulled guidance given the extreme uncertainty, but is already expecting more big near-term declines. The current quarter is going to be significantly worse, the company warned, because the coronavirus has had a more substantial impact. The negative impacts of closed stores and less traffic will likely continue into Q4.

But there is actually a bright side to all of this, and it’s found in China.

China is Starbucks’ second-biggest and fastest-growing market, and the company began shutting down locations in the country back in January, as the spread of coronavirus began to spread.

By early March, however, over 90% of Starbucks stores in China had reopened, albeit with limited hours and seating, and enhanced safety protocols.

Starbucks’ China performance has been slowly, steadily improving as well. After an eye-popping 78% comps decline back in February, business conditions have been improving on a week-over-week basis. And by April, comps were only down 35%, and management expects same-store sales to be roughly flat by the end of the fourth quarter.

While this may not be the sharp recovery that everyone would like to see—and sales won’t spike in the near-term, since stores can’t operate at full capacity--it at least provides a framework for what Starbucks can achieve here in the U.S. And that’s a promising path forward.

Looking Ahead

Starbucks is a strong, resilient company.

It’s reported annual revenue growth for the past decade, and last year’s holiday season was one of the best in the company’s history.

The company’s U.S. market was booming before the coronavirus pandemic took hold, which is a good sign. For the majority of Q2, U.S. comps were up 8%, an impressive feat for a restaurant company as big as Starbucks.

Investors shouldn’t need to worry about its dividend either. Historically, Starbucks has generated plenty of cash flow to cover its quarterly payout—free cash flow reached $3.2 billion in fiscal 2019—and management is not concerned about cutting its dividend during these times. Shares currently yield 2.25%.

As more and more states begin to lift restrictive stay-at-home orders, and more people return to their normal routines, the road to recovery will seem a little less daunting. People still need their morning coffee after all, and Starbucks will remain a go-to for many.

SBUX has declined about 17% year-to-date, though shares saw a nice bounce, up 15.7%, over the past month. The stock was trading at all-time highs last year, but now it’s considerably cheaper, trading at about 28X trailing 12-month earnings.

Growth will eventually return for Starbucks despite these short-term hiccups. Even in tough and uncertain economic times, people still want their coffee, and sometimes a $4 cup of cold brew just makes the day a little better.

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