On Tuesday April 29, Starbucks (NASDAQ:SBUX) reported its fiscal second-quarter earnings report. As a result, SBUX stock slipped slightly in after-hours trading and is actually up marginally on Wednesday morning.
There are certain stocks that are thriving under the world’s current situation, like Netflix (NASDAQ:NFLX) and Roku (NASDAQ:ROKU). Then there are stocks that are more heavily impacted than others. Unfortunately, Disney (NYSE:DIS) and Starbucks are two of those companies.
Because Starbucks depends on traffic to drive sales and traffic is down, business is hurting. You don’t need an MBA to make that distinction. While Starbucks will be negatively impacted from the novel coronavirus, that doesn’t mean its long-term business model is flawed.
Non-GAAP earnings of 28 cents per share were in-line with expectations. Revenue of $6 billion sank 12% year-over-year and beat estimates by $150 million. Global comparable-store sales sank 10% in the quarter, missing estimates calling for a 9.7% decline.
Shares were only down marginally in after-hours trading and we’ll get a better idea of how investors feel over the next few days. Will they brush this quarter aside as a one-off drop? Let’s hope not.
Look, I like Starbucks for the long term, but it’s irresponsible and short-sighted to pretend like it doesn’t have short-term issues. While lockdowns in China took effect shortly into the quarter, remember that China and Asia Pacific only represents about one-fifth of sales. Most of Starbucks’ revenue come for the U.S., where stay-at-home orders didn’t take effect until much later in the quarter.
I expect Starbucks’ third quarter to be horrendous, even as many states and countries are talking about lifting lockdown orders. On the conference call, management explained the steps they are taking once they begin reopening stores. That includes leaning on drive-through locations, Mobile Order & Pay, delivery and “entryway handoff.”
From an observational standpoint, it appears “normal” is still a ways off. That’s going to be a drag on business for the fiscal third quarter and the full fiscal year. Do investors realize this yet?
Moving Forward With SBUX Stock
Everyone and their brother knew the quarter would be underwhelming for Starbucks. It’s how the company does after the current quarter that will drive the stock price. From the press release:
We are leveraging our experience in China to inform our actions in other markets, including the U.S., where we are now entering the ‘monitor and adapt’ phase to reopen many more stores with best-in-class safety protocols.
As long as Covid-19 doesn’t continue to plague the world, investors will likely move forward with SBUX stock knowing that it’s a short-term issue. On the plus side, the virus hit China first, then the rest of the world. In other words, companies who operate in China are learning how to deal with the ordeal and apply those successful measures in other markets. For Starbucks, that is one of the few advantages in this situation.
The Bottom Line
Currently, consensus estimates call for a 7.7% decline in revenue this year and for a whopping 36% decline in earnings. Given that reality, some investors are likely surprised that SBUX stock has recouped almost two-thirds of its recent losses, while trading “just” 16% off its 2020 highs. While that’s still a noteworthy decline, it doesn’t seem so bad under the circumstances.
The rebound will be key. Analysts currently expect sales of $28.4 billion in fiscal 2021. If the company’s results are in-line with both 2020 and 2021 estimates, it will represent 16% growth from fiscal 2020 to fiscal 2021. More importantly, though, it will still represent growth from 2019. I don’t like having so-called lost years, where the rebounding year of revenue following a decline fails to surpass the prior year.
That’s the expected case for revenue, however, earnings may be a different story. While estimates call for a 36% drop this year, they also call for a ~60% rebound in 2021. If achieved, the $2.86 per share in 2021 will represent slight growth from 2019’s $2.83 per share. But it will also mean SBUX stock is back on track.
Very few companies are immune to the impacts of the coronavirus and Starbucks is no exception. But with decades of growth and experience, this leading consumer brand is not one to bail on after a few quarters of non-company-specific issues.
Stick with Starbucks and use a post-earnings dip as a buying opportunity, should one arise.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.