Few companies have been as affected by the coronavirus pandemic as Starbucks (SBUX +0.54%), which was first forced to close more than half of its stores in China, its second-biggest market, and has now limited most of its stateside locations to delivery and drive-thru.
Financially, the coffee chain is still faring better than much of the restaurant industry: especially casual dining chains that currently can't sell alcohol or serve dine-in customers, who make up the majority of their business. In an update earlier this month, Starbucks said that due to the significant impact of COVID-19 in China and the U.S., it expected to report adjusted earnings per share of $0.32 for the recently-ended second quarter of fiscal 2020, down from $0.60 a year ago. The company also warned that results in the third quarter would likely be worse, as it absorbs the bulk of the impact from shutdowns in the U.S.
Nonetheless, Starbucks has outlined a plan to begin reopening its U.S. stores on May 4.
Image source: Starbucks.
The big reopening
In a letter to employees that was also published on Starbucks' website, Rossann Williams, president of U.S. company-operated business and Canada, said the company would open as many stores as it could, using modified operations and "best-in-class safety protocols." She also said that the company will continue to prioritize the health and safety of its employees, supporting health and government officials in mitigating the spread of the virus, and will serve its communities responsibly. Its decision to reopen individual stores will be guided by data on a store's readiness, "the trajectory of the virus", and local mandates.
Starbucks has already reopened 95% of its locations in China, though many of them are operating with reduced hours and limited seating. That experience will help guide the reopening of Starbucks' U.S. stores. The company will use the first week of May to train its employees in new protocols and handoff methods, which will include drive-thru, delivery, mobile order and pay, and entryway handoff.
In keeping its commitment to employees, Starbucks will continue to pay store-level staff a bonus of $3 per hour for working during the crisis. It will also continue to offer "catastrophe pay" to those who have been diagnosed with or exposed to COVID-19 so they can stay at home. However, Starbucks plans to phase out those benefits by the end of May, as it anticipates returning to normal operations in June, assuming that the outbreak has reasonably receded by then.
What the recovery will look like
Investors should expect a slow recovery in Starbucks' performance, as the company will devote the month of May to modified operations and will be retraining employees at the beginning of the month. The trajectory of its recovery will be determined in part by what happens with the outbreak itself and how Americans react. For example, much of Starbucks' sales depend on people commuting to work, so the sooner work-from-home policies are relaxed, the sooner its sales will recover.
In China, Starbucks' comparable sales bottomed out at -90% in mid-February, and by the last week of March, comp sales were down 42% year over year. Investors could see a similar trajectory in the United States, though it may be slower, considering that some states will not have lifted their lockdown orders by May 4.
Starbucks said that U.S. comparable sales quickly plunged in March and that the decline stabilized at between 60% and 70% in the last week of March. At that time, 44% of its company-operated stores were open, so the bulk of the decline came from stores that were temporarily closed. Starbucks envisions a recovery beginning in May and a return to normal operations in June, though sales will likely still be down, depending on customer behavior and the status of the virus.
The company has warned that COVID-19 will have a bigger impact on its results in the third quarter of fiscal 2020 (April-June) than it did in the second quarter, as the United States is its largest market. Additionally, Starbucks expects the headwinds to extend into the fourth quarter.
That means investors should expect an even lower profit -- if any -- in the current quarter than in the second quarter. The good news is that the company looks well positioned to emerge from the crisis in a stronger position than its competitors, setting it up to grab market share from independent coffee shops as well as chains like Dunkin' and Luckin Coffee going forward. That may explain why Starbucks stock has held up pretty well during the crisis, essentially tracking with the S&P 500. Investors have faith that despite the obvious headwinds, the long-term growth story for Starbucks looks sound.
