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Starbucks Says Business Was Booming Before COVID-19 Struck

By Demitri Kalogeropoulos – Apr 29, 2020 at 10:49AM

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The coffee titan is optimistic that it can recapture that lost momentum -- but it will take time.

Starbucks (SBUX 1.85%) on Tuesday announced some head-turning operating metrics related to the COVID-19 pandemic that forced store closures in its biggest markets. China saw sales plummet 90% in mid-February, for example, and traffic in the U.S. began slumping when national emergency declarations spread throughout the country about a month later.

These two markets make up almost two-thirds of the coffee giant's global store footprint, which explains why the struggles there dragged down worldwide results in the fiscal second quarter. However, in a conference call with Wall Street analysts, CEO Kevin Johnson and his team explained why they're optimistic that a rebound is on the way.

Let's look at some of what was said.

A woman holding a coffee cup.

Image source: Getty Images.

Full speed ahead in China

We believe our recovery plan is working and we remain optimistic about our ability to capitalize on the long-term growth potential in the premium coffee market in China.
-- Johnson

COVID-19 had its peak impact in China in mid-February, when aggressive social-distancing orders temporarily forced comparable-store sales to almost zero. Yet Starbucks' experience since then has been uniformly positive.

Customer traffic has been steadily climbing for roughly eight consecutive weeks, with comps in April improving to a 35% slump. The metrics suggest China will be fully recovered within the next two quarters, with comps potentially returning to positive territory by Starbucks's fiscal Q4.

Management is as bullish as ever about this market and is moving ahead with aggressive plans to open stores and launch dozens of new products, including the recent move into plant-based meat alternatives by Beyond Meat. "We continue to thoughtfully invest in China," Johnson said, "a market that has significant long-term growth potential for Starbucks."

The start of the slump at home

Prior to mid-March, revenue growth in the U.S. was accelerating to the strongest level in over four years.
-- Johnson

Starbucks had been enjoying its fastest growth pace in years just before COVID-19 impacted the business. Comps were up 8% and customer traffic was running higher by 4% through most of the quarter.

Major growth drivers included beverage hits like Nitro Cold Brew and new breakfast wraps. The consumer restaurant chain also benefited from a growing base of members of its loyalty program. "It is very clear that our focus on the customer experience, beverage innovation, and digital customer relationships is a powerful combination," Johnson explained.

The pandemic quickly swamped those positive metrics due to store closures. But the negative impact through the peak might be more modest than it was in China. Most of Starbucks' U.S. locations have drive-through offerings, after all, and roughly 80% of orders were already happening on an on-the-go basis. Other hopeful signs include continued growth in the company's digital engagement and rising average spending as people make more group orders.

Getting back to growth

The U.S., Japan, and Canada, which round out our four largest markets [after China], are in earlier phases of COVID-19, which limits our ability to provide guidance at this time.
-- CFO Patrick Grismer

Executives believe the fiscal third quarter will show some of the worst operating numbers outside of China. Comps are trending down 25% through most of April, they said, and about half of the store base is still closed.

Many of those locations are set to reopen in just a few days, focusing on contactless customer experiences like delivery and drive-thru.

Management is optimistic that the company can return to the prior positive momentum it saw in early March, but cautioned investors not to expect a quick rebound or a straight-line recovery. "We do expect the impacts to persist [in the U.S.] for a longer period of time as we move through the monitor-and-adapt phase with the recovery phase extending into fiscal 2021," Grismer said.

Demitrios Kalogeropoulos owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Beyond Meat, Inc. The Motley Fool has a disclosure policy.

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