Starbucks (SBUX +0.63%) and Bloomin' Brands (BLMN +2.14%) navigated the height of the coronavirus crisis in a similar way: relying on takeout. Now, as both companies have begun opening their doors to customers, we'll all be watching the recovery process.
Image source: Starbucks.
Starbucks is a coffee shop giant, with operations worldwide and annual sales that have climbed for a decade. Bloomin' owns Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and other casual dining restaurants. Sales at Bloomin' had been on the decline for four years before showing a slight recovery last year.
Starbucks and Bloomin' shares are down 12% and 50%, respectively, this year. Is this an entry point, and if so, which of these companies represents the best investment? Let's take a closer look.
Starbucks' position of strength
Starbucks was in a position of strength prior to the coronavirus outbreak. This past holiday season was one of the company's best ever. The trend continued in the early part of the fiscal 2020 second quarter. Starbucks was heading for its strongest revenue growth in the U.S. in more than four years, with comparable-store sales growth of 8%. Then the health crisis began.
The coronavirus had already hurt Starbucks in China, its second-biggest market. There, the company temporarily closed more than half of its stores as of Jan. 28, with closures peaking at about 80%. In the U.S., the coffee chain closed most locations but turned to a drive-thru model.
So far, we've seen some of the impact in the recent earnings report. Starbucks posted a 5% decline in second-quarter revenue and a 47% drop in earnings per share. But the company said the worst will come in its next report, which covers more weeks of coronavirus impact in the U.S., its biggest market.
Still, recovery is in sight. Starbucks expects that to start this month as it reopens its shops. The goal is to open 90% of U.S. locations by June. Don't count on hanging around your local Starbucks, though. Starbucks still is focusing on entryway pickup, curbside delivery, and other techniques that allow for social distancing.
Bloomin' Brands' turmoil
Bloomin' started the year with a bit of turmoil. In November, the company put itself up for sale, then earlier this year, activist investor JANA Partners -- a supporter of options such as a sale or spinoff -- said it would nominate three directors to the company's board. The move was seen as renewed pressure for a Bloomin' sale. JANA and Bloomin' later reached an agreement on two board nominees proposed by JANA. But any potential sale or alternative may not happen soon. In its most recent earnings call, Bloomin' said all "exploration of strategic alternatives" spoken of in November were halted because of the coronavirus crisis.
As diners have turned more and more to fast-casual options such as Chipotle Mexican Grill (CMG 2.34%) or Panera, sales at Bloomin' have faltered. Could the revenue gain we saw last year be an inflection point? Possibly. Dine-in revenue clearly fell this past quarter due to the temporary restaurant closures, bringing total revenue down more than 10%. But takeout and delivery sales per restaurant at Bloomin' have tripled since early March, and the company said it aims to maintain most of these market share gains even as dining rooms reopen.
During the coronavirus crisis, the increase in takeout and delivery order volumes helped Bloomin' cut its weekly cash burn rate to the range of $6 million to $8 million from the range of $8 million to $10 million. The company said the burn rate would improve further as dining rooms reopen.
In the company's latest earnings call, Bloomin' said it is encouraged because at the 23 Outback Steakhouse restaurants open at limited capacity for the week ending May 3, comparable sales were only down 17% year over year.
Starbucks or Bloomin'?
Better days may be ahead for Bloomin'. The agreement with JANA Partners, Bloomin's revenue trend prior to the coronavirus outbreak, and gains in takeout during the crisis are positive.
Still, I favor investing in Starbucks' shares for a few reasons. Valuation is one. Starbucks trades at 27 times trailing-12-month earnings, while Bloomin' trades at 35 times earnings. I also like Starbucks' trend of annual revenue growth and the revenue strength prior to the crisis. Starbucks may also benefit from customers' behavior as life returns to not-quite normal. Customers may be ready to stop at their local Starbucks to quickly pick up coffee, but they still may hesitate to dine at a restaurant until the coronavirus crisis is truly over.
So, in this coffee shop-restaurant competition, I lift my mug to Starbucks.
