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Starbucks Expects COVID-19 to Slash Profits in Half

By John Ballard – Updated Apr 9, 2020 at 8:25AM

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The good news is that management expects the China business to fully recover in the next two quarters.

With social distancing requirements going into effect last month, it was a foregone conclusion that earnings results were going to take a hit this quarter. Starbucks (SBUX -2.67%) issued preliminary financial results for the fiscal second quarter on April 8 that made it official. 

The company expects earnings under generally accepted accounting principles (GAAP) to be approximately $0.28. Non-GAAP (adjusted) earnings are expected to be $0.32. That is down from the year-ago adjusted earnings of $0.60. Starbucks will release second-quarter results on April 28. 

While the businesses in China and South Korea are recovering, the U.S. business is still working through the trough, with 44% of company-operated locations functioning but with modified store hours. 

A Starbucks employee, wearing a green apron, holds a cup with the Starbucks logo printed on the side.

Image source: Starbucks.

The coffee chain will bounce back

The COVID-19 outbreak is a health tragedy, and it's unfortunate for those businesses that were performing exceptionally well before a pandemic forced a mandated economic shutdown. In the U.S., Starbucks was having its best quarter in four years prior to the shutdown. Quarter-to-date through March 11, U.S. comparable store sales were up 8%, with comparable transaction growth of 4% year over year -- a testament to the company's tremendous brand power

Fortunately, this consumer discretionary stock is in a good enough financial position to pay its retail partners through May 3, whether they are working or not. Starbucks is also offering free coffees to first responders and health professionals. 

In a letter addressed to all Starbucks stakeholders, CEO Kevin Johnson said, "We continue to believe that these extraordinary circumstances are temporary, and we expect that Starbucks will emerge from this global crisis even stronger than before." Johnson expects China to fully recover in the next two quarters, which is encouraging news for investors. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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