Starbucks (NASDAQ :), the international coffee chain, has seen its operations turned upside down by the worldwide coronavirus outbreak and worldwide lockdowns.
The seller of pumpkin puree and frappuccino lattes suffered huge losses this year, as customers stayed indoors and the pandemic forced shutdown of retail. As economies reopen worldwide, investors are keeping a close eye on how quickly this company is recovering.
Due to its global presence, Starbucks is also a barometer to measure consumers' willingness to resume normal life and reopen their wallets. After the third quarter of last week, the company's future outlook became somewhat clearer. It also provided investors with new information.
After falling more than 30% in mid-March, the shares of the Seattle-based company have gained significant ground. They closed on Friday for $ 76.53, down 13% for the year.
Pandemic Damage
With most offices closed and people working from home, Starbucks got the full impact of the pandemic during the fiscal third quarter ended June 28 . Worldwide sales of the same stores declined by 40% over the period, reporting the steepest earnings-per-share losses in more than a decade.
Starbucks was one of the first global brands to experience the impact of the corona virus due to its massive presence in China. During the pandemic, the company continued to pay employees who chose to stay at home because of virus problems, while offering bonuses to those who worked.
This combined headwind cost Starbucks $ 3.1 billion in sales over the period due to store closings, limited hours, and fewer customer visits. So where does Starbucks come from?
Despite this bleak picture, there are some signs in the latest earnings report showing that perhaps the worst is over for the company. Starbucks said 96% of the company's US stores are now open, with at least still to go and limited dining service.
More customers have shifted purchases to suburban locations of urban destinations, where traffic remains thin. As sales take longer to recover during the pandemic, average orders rose 25%, aided by food and drink sales to families rather than individuals. Sales of packaged Starbucks coffee have also increased as workers remain at home.
US Comparable-Store Sales
Another positive indicator indicating that customers are returning to Starbucks came from the company's sales of comparable stores in the US, a important indicator of restaurant performance. That gauge turned positive in July for stores operated by the company that remained open throughout the quarter.
Executives said they expect sales of the same stores in China and the US to recover significantly by the end of Starbucks fiscal and Q1 2021, about a year after the onset of the crisis, assuming that there are no new persistent waves of infections or major economic disturbances. Margins are expected to follow in the next two quarters.
According to CFO Pat Grismer:
"We have a long way to go to fully recover, but we are optimistic based on the strength of our brand and the strategy and initiatives we have in place to drive sales and improve margins."
Starbucks is in our opinion an innovative company. It is rapidly changing its business model to counter the pandemic slowdown. The company plans to accelerate the rollout of the 'pickup' store concept, with smaller locations without customer seats.
Starbucks expects to open 300 net new stores in America this fiscal year, half the previous estimate. That includes the closure of 400 outlets operated by the company over the next 18 months, in addition to opening "a larger number of new, repositioned stores in different locations and innovative store formulas."
Bottom Line
The restaurant business is still embroiled in the backlash of this global health crisis. Consumers stay at home and employees away from their office. While Starbucks reported some positive trends for its margins and the same retail sales, there is still a long way to full recovery for the chain.
That said, Starbucks' global scale, brand strength and innovative culture make it a solid turnaround bet for long-term investors. We expect it to emerge from the COVID-19 crisis, both leaner and more efficient.
