As people stay away from crowded places during the coronavirus outbreak, leaving restaurants and bars empty, Starbucks' (SBUX +1.53%) new "to go" initiative in the U.S. and Canada may keep coffee fans coming around to get their daily cup of joe. Starbucks initially announced a system that included orders at the counter, then five days later moved to drive-through only. Though Starbucks, like peers, surely will see a drop in traffic, the effort may help the company minimize losses.
Image source: Starbucks.
The coronavirus outbreak isn't new to Starbucks. As the crisis developed and escalated in China, the company's second-largest and fastest-growing market, Starbucks closed 80% of its stores there. Starbucks, which has since reopened more than 90% of them, said in a recent filing that second-quarter revenue in the country may fall by $400 million to $430 million due to the outbreak. As for earnings per share, the negative effects will be in the range of $0.15 to $0.18 per share on a GAAP and non-GAAP basis.
Orders through the app
China's coronavirus cases have topped 81,000 as the country most hit by the pandemic, but transmission now is slowing as it picks up in other areas of the world such as the U.S. -- Starbucks' biggest market. The U.S. currently has reported more than 27,000 cases. Starbucks said on March 20 that in the U.S. and Canada, it would move to the drive-through only model in company-operated stores in the U.S. and Canada for a period of two weeks. About 60% of Starbucks shops have drive-through services, according to press reports.
Now the question is whether Starbucks' plan is enough to help it through the coronavirus pandemic. If the company is able to maintain a steady stream of takeout business through the drive-through, the strategy could help revenue. But investors shouldn't expect miracles when the next earnings report rolls around.
This temporary model, focused on grabbing your order and driving away, is the opposite of the usual Starbucks experience that involves sitting down -- and often, with others. Those customers won't be at Starbucks these days, or anywhere else, considering the need for social distancing in order to slow transmission of coronavirus. The strategy will, however, help Starbucks maintain at least some of the customers who stop by quickly for their daily coffee. Things could change if the government orders a complete shutdown of restaurants and similar establishments, though.
Lowest since 2018
Starbucks shares have lost 39% so far this year, falling to their lowest since 2018. Further declines will depend on the duration of the coronavirus outbreak in the U.S. As Americans avoid public places and fear of contamination escalates, it's likely people won't flock to Starbucks drive-through windows in droves. So what does this mean for investors? As Starbucks announced negative effects on earnings from the coronavirus crisis in China, it may have to update those figures considering coronavirus effects in the U.S. That could represent another wave of bad news on the horizon.
That said, this pandemic -- no matter how painful for companies -- is temporary. Though it may hurt a quarter or more of earnings, otherwise healthy companies like Starbucks remain interesting over the long term. Starbucks has reported positive earnings surprises for three out of the past four quarters and has increased revenue over at least the past three years. Once the coronavirus crisis passes, it's likely these positive trends will continue.
