Starbucks (NASDAQ:SBUX) recently reported dismal fiscal third-quarter results, and its new strategies are unlikely to enable SBUX stock to fully recover from the impact of the pandemic, the e-commerce revolution, and the work-from-home trend.
Starbucks’ fiscal third-quarter results somehow beat analysts’ average estimates by narrow margins, but they were pretty horrible. The results suggest that the company cannot thrive in the current environment in which work-from-home, drive-through and takeout orders are such important trends.
The company’s revenue plunged 38% year-over-year, and its comparable sales tumbled 41% YOY. On the company’s earnings conference call, Starbucks CEO Kevin Johnson noted that the weekly comparable sales of the company’s U.S. stores ” steadily improved throughout the quarter from the low point, a decline of minus 65% in mid-April up to minus 16% as we exited Q3.”
But sadly, a decline of 16% at the end of the quarter, when the economies of most states were fully opened, is really not something to be happy about and indicates that the company and SBUX stock will likely struggle mightily going forward.
Comparing Starbucks’ results to those of McDonald’s (NYSE:MCD) is, I think, quite enlightening. McDonald’s, like Starbucks, is a truly global company and basically faced the same challenges. Moreover, many pundits say that McDonald’s is actually poorly suited for the current drive-in/takeout environment.
Yet McDonald’s total comp sales fell 24% YOY, versus Starbucks’ 38% decline. The fast-food chain’s revenue dropped 30% YOY, compared with the 41% tumble of Starbucks’ sales. In June, McDonald’s U.S. comps were off just 2.3% YOY, versus Starbucks’ 16% decline as of the end of its Q3.
Fundamental Problems With SBUX Stock
Starbucks’ main problem is that its sales, at least in the U.S., are closely tied to office work, in-person shopping, and in-person socializing. Office workers loved to get their Starbucks coffee before heading to work in the morning and, to a lesser extent, after lunch and in the mid-afternoon.
Shoppers at malls enjoyed taking breaks that revolved around coffee that they obtained from a Starbucks stand in or near the food court. For example, between 2010-2013, I would frequently go to the Pentagon City Mall in Arlington, Va. at lunchtime and on the weekends, I remember that there were always long lines at the Starbucks there, particularly from November through April. And finally, groups of friends and family enjoyed sitting around tables, leisurely drinking their Starbucks coffee at the company’s stores.
Once a vaccine for the novel coronavirus arrives, life will become more similar to the way that it was in 2019, but many millions more people will likely be working from home than previously, and the malls will never be as crowded as they once were. And importantly, more people will turn to food takeout and delivery than previously, cutting into the amount of time spent socializing at eating/drinking establishments in general and at Starbucks in particular.
In my opinion, Starbucks is not at all well-suited to the takeout and delivery culture. Given that consumers can very easily make pretty good coffee at home, how many of them will be tempted to pay a $5 delivery fee to obtain coffee from Starbucks or drive five or ten minutes each way to their local Starbucks to get coffee from there? Probably not very many.
The New Strategies Probably Won’t Be Enough
To his credit, I believe that Johnson is making all the right moves in an effort to boost the company’s results.
He’s bringing Starbucks’ packaged coffee into dozens of new markets, “introducing a new curbside pickup experience that will be available in 700 to 1,000 locations by the end of this quarter,” and launching smaller “Starbucks Pickup stores” in cities to make buying Starbucks’ coffee in urban locations faster and more convenient.
Additionally, Johnson is trying to further improve the company’s digital capabilities.
But it will take Starbucks time to roll these initiatives out and more time for them to gain meaningful traction. Further, I don’t think that they will be able to come close to completely offset the huge trends against which Starbucks is fighting.
The Bottom Line on SBUX Stock
Starbucks’ stock is down just 20% from its 52-week high. Meanwhile, the company’s business obviously being badly hurt by huge trends that will persist to some extent for a long time. In light of these points, investors should sell SBUX stock at its current levels.
As of this writing, the author did not own any of the aforementioned stocks.