Starbucks (NASDAQ:SBUX), the international coffee chain, has seen its businesses turned upside down by the global coronavirus outbreak and worldwide lockdowns.
The seller of pumpkin-spiced lattes and frappuccinos has suffered massive losses this year, as customers stayed indoors and the pandemic forced closures of its retail operations. As economies reopen globally, investors are closely watching how quickly this company recovers.
Because of its global presence, Starbucks is also a barometer with which to measure consumer willingness to resume their normal lives and reopen their wallets. After last week's Q3 earnings report, the company’s future outlook became a little more clear. As well, it provided investors with new information.
After plunging more than 30% by the middle of March, the Seattle-based company’s shares have recovered considerable ground. They closed on Friday at $76.53, down 13% for the year.
Pandemic Damage
With most offices closed and people working from home, Starbucks faced the full-impact of the pandemic during its fiscal third quarter period which ended on June 28. Its global same-store sales fell 40% during the period and it reported its steepest earnings-per-share losses in more than a decade.
Starbucks was among the first global brands to face the impact of the coronavirus due to its massive presence in China. During the pandemic, the company continued to pay employees who opted to stay home due to virus concerns, while offering bonuses to those who worked.
These combined headwinds cost Starbucks $3.1 billion in sales in the period, due to store closures, limited hours and fewer customer visits. So where does Starbucks go from here?
Despite this grim picture, there are some signs in the latest earnings report showing that perhaps, the worst is over for the company. Starbucks said 96% of its company-owned US stores are now open, with at least to-go and limited dine-in service.
More customers have shifted purchases to suburban locations from urban destinations, where traffic remains thin. While sales are taking longer to recover amid the pandemic, average orders were up 25%, helped by food and drink sales to families rather than individuals. Packaged Starbucks coffee sales are also up, as workers remain at home.
US Comparable-Store Sales
Another positive indicator that shows customers are returning to Starbucks came from the company’s comparable-store sales in the US, a key gauge of restaurant performance. That gauge turned positive in the month of July for the company-operated stores that stayed open during the entire quarter.
Executives said that they expect same-store sales to recover more substantially in China and the US by the end of Starbucks' fiscal 2021 first and second quarters, about a year after the crisis began, assuming there are no new sustained waves of infections or major economic disruptions. Margins are expected to follow in the next two quarters.
According to CFO Pat Grismer:
“We still have a long way to go to get back to full recovery, but we’re optimistic based on the strength of our brand and the strategy and initiatives that we have to drive sales and improve margins.”
Starbucks, in our view, is an innovative company. It’s quickly changing its business model to counter the pandemic-related slowdown. The company plans to accelerate the rollout of its “pickup” store concept, with smaller-format locations that don’t have customer seating.
Starbucks expects to open 300 net new stores this fiscal year in the Americas, half its earlier estimate. That includes the closure of 400 company-operated outlets over the next 18 months alongside the opening of a “greater number of new, repositioned stores in different locations and with innovative store formats.”
Bottom Line
The restaurant business is still mired in the backwash of this global health crisis. Consumers remain at home and workers away from their offices. While Starbucks reported some positive trends for its margins and same store sales, there's still a long road to full recovery for the chain.
That said, Starbucks’ global scale, the power of its brand, and innovative culture make it a solid turnaround bet for long-term investors. We expect it will emerge from the COVID-19 crisis both leaner and more efficient.