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Starbucks (SBUX) will not lose its flavor amid the COVID-19 crisis

Starbucks believes it has sufficient liquidity to manage through this crisis

Starbucks’ (NYSE: SBUX) shares were up 2.4% in afternoon hours on Thursday. Over the past one month, the stock has gained over 15%. The company cut its second quarter EPS guidance and withdrew its full-year outlook on Wednesday due to the coronavirus outbreak.

Comparable store sales in the US grew 8% up until mid-March after which the company saw a sharp decline. Comp sales were down around 3% in the second quarter versus the year-ago period, reflecting the harsh impacts of the coronavirus outbreak in the final weeks of the quarter. 

Starbucks now expects Q2 2020 GAAP EPS to be approx. $0.28 and adjusted EPS to be approx. $0.32. This compares to adjusted EPS of $0.60 that the company reported in Q2 2019 and adjusted EPS of $0.38 that analysts had predicted.

starbucks image
Photo by Szymon12455 on Unsplash

Due to the prevailing uncertainty related to the COVID-19 outbreak, the company withdrew its financial outlook for full-year 2020. The coffeehouse chain also said it expects adverse financial impacts to be higher in Q3 versus Q2 and for this to extend into Q4. Despite the short-term challenges, it is likely that Starbucks will prevail during this crisis.

Firstly, Starbucks has strong fundamentals. In its most recent quarter, the company’s revenues grew 7% while adjusted EPS rose 5%. Comparable store sales increased 5% worldwide. Comp sales were up 6% in the US and 3% in China. The company has a steady track record of returning cash to shareholders through buybacks and dividends.

During the crisis, Starbucks restricted its operations to drive-thru and delivery channels and shifted to a ‘to-go’ service model. The company has been investing in improving its online capabilities and these services are likely to catch on with customers even after the pandemic subsides. This will strengthen the company’s position going forward.

Starbucks also enjoys a level of popularity with its customers that will not erode anytime soon. In the first quarter, the company’s Rewardsloyalty program saw a year-over-year growth of 16% to reach 18.9 million active members.

Starbucks is seeing a recovery in its operations in China that has picked up pace from February through March. In the last week of March, comp sales declined 42% compared to a weekly low of 90% seen in mid-February. 95% of stores are now open and running albeit with restrictions in business hours and seating capacity. The company also opened two new stores in late March.

Starbucks believes it has sufficient liquidity to manage through this crisis. At the end of Q2, the company had around $2.5 billion of cash and cash equivalents. It also has short-term borrowing facilities totaling $3.5 billion which will provide near-term liquidity if needed.

To sum it up, Starbucks appears to be capable of navigating through this crisis and emerging from it in a pretty stable condition. The pandemic will not take away this coffee company’s flavor.

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