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Starbucks Says Virus Plan From China Will Work in U.S.

Ed Ludlow
Starbucks Says Virus Plan From China Will Work in U.S.

(Bloomberg) -- While for many U.S. restaurants it seems the sky is crashing down, Starbucks Corp. has a unique perspective after having gone through the same thing in China. Their chief executive officer’s message is this: If the strategy to contain coronavirus worked in China, it will work in North America too.

“Our team in China defined elevated cleaning protocols for stores,” CEO Kevin Johnson told investors during a meeting with shareholders that was webcast for health reasons. “They basically created a model we are now using around the world, and we know that model worked.”

The company now expects 95% of its China stores to be open in some form by the end of March. Currently 90% are open, although many are operating with reduced hours. For context, the virus began sparking widespread alarm and disrupting daily life in China in the second half of January.

In the U.S., Starbucks is paying more workers to ensure its stores are cleaned more frequently. It’s also guaranteeing pay for any hourly workers who have come in to contact with the virus and need to stay home. The company has moved to close some locations and operate the rest via carryout, drive-thru or delivery.

Leverage Cap

All of this, of course, will have a financial impact. Restaurant operators such as Denny’s Corp. and Ruth’s Hospitality Group Inc., have tapped or increased credit lines amid the sudden slowdown of sales.

In Starbucks’ case, the impact will be temporary, Chief Financial Officer Patrick Grismer said. He added the outbreak will cause the company to exceed the upper leverage cap it sets “for a period of time” due to earnings being impacted by the outbreak. The company’s target is to keep leverage from exceeding three times adjusted Ebitda, a measure of earnings that excludes items such as taxes, depreciation and amortization.

Starbucks shares have fallen 40% since Jan. 20 through yesterday’s close, when the first U.S. virus case was reported. The company alerted the Securities and Exchange Commission on March 4 it would be making its annual shareholder meeting virtual in light of the concerns about the coronavirus and the high number of cases in Washington State.

The company has targeted China and the U.S. as its two most important markets. The Seattle-based chain has more than 4,000 locations in China and about 14,000 in the U.S.

Facing weeks or months of being closed or carryout only, the National Restaurant Association today called on President Trump for relief measures, including tax credits, tax cuts and access to loans and funding. While immediate aid may be needed for much of the industry, Starbucks’ CEO assured that there’s some light at the end of the tunnel.

“We have a strong balance sheet, great partners and great resolve to come out of this,” Johnson said.

(Corrects characterization of why company will temporarily exceed its leverage cap in fifth and sixth paragraphs.)

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