In some ways, Starbucks (NASDAQ:SBUX) did exactly what analysts expected for its fiscal second-quarter earnings report, falling short of profitability estimates. At the same time, the global coffee phenom produced a surprising positive result for revenue. However, if you think this is a sign that the economy is improving for SBUX stock, you better think again.
Let’s dive into the key numbers first. Ahead of fiscal Q2, analysts pegged their consensus earnings-per-share target at 34 cents. Instead, Starbucks delivered 32 cents. Given the turmoil that the novel coronavirus has caused, this isn’t bad in my opinion.
On the revenue front, Wall Street forecasted $5.89 billion. Here, the company pulled out a surprising beat, ringing up $6 billion. However, analysts were quick to note that this represented a 5% year-over-year decline. On their conference call, management referenced store closures, mitigation efforts, and reduced hours as severe headwinds.
Still, investors immediately soured on SBUX stock. For one thing, management did not provide full-year guidance, which they pulled in April. However, they admitted that the current quarter (ending June 30) will incur greater negative impact. That didn’t please the Street, which was hoping for a significant sign of improvement in consumer sentiment.
Interestingly, recent news that Starbucks was planning to reopen 90% of U.S. stores failed to inspire SBUX stock.
It’s not that the company is devoid of positives. Again, the revenue beat is an indicator that the brand levers tremendous loyalty, even in hard times. Further, the disaster that is Luckin Coffee (NASDAQ:LK), which our own Will Ashworth expertly chronicled, is a positive for Starbucks.
However, China comparable store sales were down 50% YOY, suggesting much work ahead.
Devastated Consumer Economy Will Hurt SBUX Stock
Right now, the biggest concern I have for SBUX stock is the consumer economy. As you know, the Department of Labor released new unemployment data, which again was grim. For the week ending April 25, 3.8 million workers filed jobless claims. Over a six-week period, 30 million Americans requested unemployment benefits.
For any organization, this is a staggering figure. But I think it’s especially bad for retail names like Starbucks because it a) invites competition and b) discretionary purchases are often the first (and easiest) personal budget items to cut.
In October of 2019, I urged investors to be cautious on SBUX stock ahead of Q4 2019 earnings. Mainly, I worried that in troubled times, competitors can undercut Starbucks. I wrote:
In other words, the company imposes all-or-nothing pricing. If you want the good stuff, you have to pay up. Everything else tastes like crap.
Under a bull market, this is totally fine. However, if we fall into a recession like many are beginning to fear, I’d worry about SBUX stock. Starbucks’ premium coffee is a frivolous luxury. And because their basic stuff is wretched, any competitor suddenly becomes a viable competitor.
If that weren’t bad enough, abstaining from overpriced coffee is among the easiest courses of action for hurting workers. For instance, if you typically spend $4 a business day at Starbucks, you can easily rack up a monthly bill of nearly $90. By the second month, you’re looking at almost $180.
Now, take a look at a Keurig K-Mini, which retails for $80. You buy that and pick up a couple Starbucks (or other premium) branded K pods. By the second month, you’re ahead of the game while still enjoying premium and convenient coffee.
More Pain to Come
Recently, I’ve heard the argument that the silver lining in the jobless claims is that the rate of claims has declined. That’s true. However, as Ian Shepherdson, chief economist at Pantheon Macroeconomics, the pain is just now beginning. Initial claims came from lower-income workers. Now, we’ll start seeing higher-compensated workers waiting in line. Shepherdson wrote:
You can’t close a bar twice…Layoffs are now working their way through management and supply chains and business services.
Indeed, this is a sobering thought. Therefore, Starbucks’ management ream wasn’t messing around when they anticipated a greater hit this quarter. Frankly, management and business services is where Starbucks generates its consistent, loyalty-driven revenues.
Without the “normals,” as my friend likes to call cubicle warriors, the barista faces a very uncertain future. And that’s why I’m not in any mood to rush into SBUX stock right now.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.