Investors are bracing for Starbucks (NASDAQ:SBUX) to report a fiscal third-quarter loss when it reports earnings July 28. SBUX stock will continue to suffer as long as the novel coronavirus remains unchecked in the U.S.
Coffeehouses, after all, are entirely a social experience. They’re designed to encourage customers to lounge in comfortable seats, chat, read a book or surf the web. The allure (aside from the caffeine) is the humanly social experience of being with other people.
That’s an area where Starbucks excelled before Covid-19. Its coffeehouses are warm and inviting. Many stores have leather club chairs, café tables and other areas where it’s easy to tap into the free Wi-Fi and work.
It’s hard to enjoy socialization these days. Even where Starbucks locations are welcoming customers, patrons need to socially distance. And once you get up from your table, you need to put your mask on, which makes it really hard to sip your coffee.
All in all, the hassle just isn’t worth the experience any longer. And you’ll see that when the company reports earnings for its fiscal third quarter.
SBUX Stock Earnings Preview
Starbucks is expected to report quarterly revenue of $4.13 billion, which would be down 39.5% from a year ago. Losses per share are expected to come in at 60 cents, which according to Zacks Equity Research, would be down 177% from the same quarter a year ago.
For the year, Starbucks stock is down 14.3%, which is worse than the performance you’ll find from competitors McDonald’s (NYSE:MCD), which is even for the year, and Dunkin Brands (NASDAQ:DNKN), which is down 8%.
After closing many of its stores in China during earlier this year, Starbucks was forced to shut down its U.S. stores beginning in mid-March. That forced net revenues down by nearly 5% on a year-over-year basis, with operating income falling by 43% and net earnings down more than 50%.
For the fiscal third quarter, investors can expect a rebound from the company’s operations in China, but U.S. store sales will likely take a beating.
The company kept as much of its business open as possible in the U.S. in the second quarter, offering drive-through and delivery service while slowly opening to takeout and dine-in in some locations.
But considering that the quarter covered the period in which mandatory shutdowns and stay-at-home orders were in effect for much of the country, investors can have little hope that Starbucks will be able to put up some impressive numbers when it reports earnings.
There’s Some Light Ahead
The biggest takeaway for me in the Starbucks earnings report will be the company’s forecast for its fiscal fourth quarter and the rest of 2020. And there’s some reason for hope in that regard.
Starbucks says its same-store sales for the last week of May were down only 28% on a year-over-year basis, which indicates that the company is beginning a slow rebound.
Nearly all of the company’s stores have reopened, although there are fears in some states that the resurgence of Covid-19 infections will force some restaurants to close again.
And Starbucks is adjusting to cope with how to run a customer-centric business in a Covid-19 environment. Starbucks’ digital app takes advantage of the trend of customers who just want to drive through or pop into a Starbucks long enough to grab their coffee drink and go.
CEO Kevin Johnson says 80% of the company’s business before the coronavirus was grab-and-go, so I’m expecting those numbers to continue to rise. Anything that Johnson says about Starbucks app downloads and usage in the fiscal third quarter will be key to analysts’ projections of future performance.
Brown Advisory recently published its second-quarter investor letter that highlights SBUX stock as one it expects to emerge from the pandemic in a strong position. Analysts at Polen Capital Management are also bullish on Starbucks in its investor letter.
The Bottom Line on SBUX Stock
Brace yourself for an inevitable loss this quarter. But it’s reasonable to believe that improved sales in China, coupled with a slowly rebounding U.S. business will help Starbucks exceed analysts’ low expectations.
The key takeaway from this earnings report will be how many people are using the Starbucks mobile app on a regular basis, and the company’s projections for the fiscal fourth quarter despite the possibility of continued Covid-19 shutdowns.
All in all, Starbucks remains a solid company with a depressed stock price. For long-term investors, this is likely a good opportunity to pick up shares of Starbucks, but short-term investors likely need to sit this one out.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.