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Is Starbucks Stock a Buy?

By Daniel B. Kline – May 2, 2020 at 10:23AM

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The coffee chain has been very resilient in the face of the coronavirus.

Starbucks (SBUX -2.67%) has dealt with significant global disruption, yet it still managed to make a profit. The coffee chain has seen all of its stores across the globe close their dining areas for some period of time -- with many still offering drive-through, delivery, and pickup -- and it has held onto its customer base.

The chain reported that it had net revenue of $6 billion in the second quarter. That's down 5% year-over-year, but incredibly impressive given the circumstances. It was also profitable, earning $0.28 per share. That's a drop of 47% compared to Q2 2019, but it's a very impressive number given the operating environment. Same-store sales were also strong, dropping by only 10% and "driven by a 13% decrease in comparable transactions, partially offset by a 4% increase in average ticket," according to the Q2 earnings release. 

A Starbucks worker wearing a mask.

Starbucks has been operating many of its stores for drive-through, pickup, and delivery. Image source: Starbucks.

A path back to normal?

CEO Kevin Johnson laid out the company's plans in the earnings release. He was optimistic but also realistic in explaining how things would happen.

"Since the beginning of this global crisis, Starbucks has made decisions that prioritize the well-being of our partners and customers, support health and government officials, and responsibly serve our communities," Johnson said. "This principled approach is showing steady business improvement in China where today, substantially all existing Starbucks stores have reopened with modified operations, new store locations are being added and customer engagement continues to grow with each passing week."

It's not business as usual. Stores have social distancing measures in place and many have not reopened their dining rooms. It's encouraging, however, that Starbucks has gone this far down the path to returning its operations to some form of what they once were.

"We are leveraging our experience in China to inform our actions in other markets, including the U.S., where we are now entering the 'monitor and adapt' phase to reopen many more stores with best-in-class safety protocols," Johnson added. "We continue to navigate this dynamic situation -- which we believe is temporary -- and are confident that Starbucks will emerge from this global crisis even stronger than before."

During the quarter Starbucks also grew its Rewards loyalty program to 19.4 million active members in the U.S. -- up 15% from the same quarter a year ago. That's likely due to many people placing drive-through or pickup orders through the app in order to not have to interact with a store worker to pay.

Is Starbucks stock a buy?

The Q2 earnings release did not offer guidance on the third quarter. It basically said, "We don't know yet." It did acknowledge that the next quarter will likely be worse, saying: "[W]e expect the negative financial impacts of COVID-19 to be significantly greater in Q3 FY20 compared to Q2 FY20, and to extend into Q4 FY20 but at a more moderate level."

That may sound like bad news, but a down quarter or even three does not change your investing thesis. Starbucks has shown that it's an incredibly strong brand that can adapt to unique operating conditions. The fact that it made a profit at all under these circumstances suggests that the company will thrive for years to come.

Starbucks is a buy. It's a fast-growing, forward-thinking company that has an incredibly loyal customer base. It may suffer for a few quarters, but it will come out the other side in incredibly strong shape.

Daniel B. Kline owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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