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Why I'm Holding Starbucks Stock No Matter What

By Daniel B. Kline - Mar 10, 2020 at 12:30PM

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The worst may be yet to come for the coffee chain.

Starbucks (SBUX -0.55%) has already faced major business disruptions due to the coronavirus. The chain chose to close more than half of its stores in China, and it operated many others under strong restrictions, like only offering takeout.

Those problems may eventually reach the United States. Even if the coffee chain does not face massive closures, it's going to lose sales as people leave the house less often and cancel trips to the kinds of tourist attractions that are strongholds for Starbucks.

The impact on earnings will be significant -- but eventually, the crisis will pass and customers will return.

A mostly empty Starbucks.

Starbucks may see lower customer counts even if stores don't close. Image source: Starbucks.

Sales will be lost

When a consumer puts off buying a mattress or a new stove because of the coronavirus or some other economic disruption (like a loss of wages) caused by the virus, he or she probably makes that purchase at a later date. The purchase cycle has been disrupted, but at some point the sale still gets made.

just That's not really true for Starbucks. If customers can't buy their morning latte or they miss out on a Frappuccino, they don't buy one for each day they missed once the crisis has abated. Maybe returning visitors will be a little more indulgent, but someone ordering a bigger size or adding on a pastry won't make up for lost sales.

Starbucks is going to take an earnings hit because of the coronavirus. At the moment, it's almost certainly already losing sales in the U.S. as some people opt to leave the house less. That's going to get worse even if the company never has to (or never chooses to) close stores.

This earnings dip could span multiple quarters, and it's going to look terrible, but it changes nothing about the company. Starbucks remains the same incredibly strong brand -- it's simply handling a situation it does not control.

Nothing has changed about Starbucks

Sometimes a drop in earnings shows that consumer tastes have changed. In this case, it seems unlikely that once the concerns pass consumers won't settle back into their routines. The coronavirus simply isn't going to teach people that they don't need expensive coffee, and it won't change long-term projections for Starbucks.

The coffee chain is actually built well for a recession. In harder times consumers may put off big trips and certain purchases. Starbucks, however, sells an affordable indulgence. People may put off big expenses, but they probably won't give up their coffee anytime soon.

This crisis shows why earnings don't always tell the full tale for any company. You have to look a little deeper to see why a company posts a drop. In this case, anyone can look and see why this disruption is an anomaly beyond the company's control. Customers will return once the worst of the coronavirus passes, or at the point it has been decided that the threat has passed.

For now, settle in and make yourself a latte (or go get one while you still can). Starbucks will suffer, but it will recover and emerge as strong as ever.

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