As governments around the world are lifting stay-at-home orders, businesses are adapting to meet the challenges. For some companies, these changes are raising costs and hurting the bottom line, even if they have increased sales.
Starbucks (SBUX +0.63%) and Domino's (DPZ 2.72%) both are dealing with changes brought on by the coronavirus pandemic. However, while Domino's is experiencing some slowdowns in its international business, overall revenue is increasing robustly. On the other hand, Starbucks is going through an increase in costs and a decrease in revenue simultaneously.
Starbucks is adapting to the new business environment. Image Source: Getty Images.
Domino's
The COVID-19 pandemic has caused relatively mild disruptions at Domino's. Nearly all of its U.S. stores remain open. At its peak, there were 2,400 temporary store closures in its international business that are now down to 900 closures as of May 24. Domino's is the largest pizza company in the world, with more than 17,000 locations in over 90 markets around the world.
Further, sales in its U.S. stores are accelerating. Domino's provided an update to investors and showed overall sales are up 5.7% in the most recent eight weeks. However, the results were bifurcated, with revenue in the U.S. climbing by 17.8%, while international sales decreased by 6.2%. In fiscal 2019, its overall revenue of $14.3 billion was split almost evenly between the U.S. and international geographies.
The increase in revenue allowed the company to pay back most of the short-term borrowing it took on as a precautionary measure. It had initially borrowed $158 million and was able to pay back $100 million of that loan. Still, the company has $250 million in cash on the balance sheet.
Although the near-term results are encouraging, it is uncertain how long this surge will last. In the May 26 press release, Domino's CEO Ritch Allison said, "We are seeing a tailwind as consumer behavior across the restaurant industry has shifted toward delivery and carryout, though we are not sure whether this trend will continue for the remainder of the second quarter or how long this tailwind may last."
Dominoes updates investors to tell them business is booming. Image Source: Getty Images.
Starbucks
As of March 29, Starbucks has over 32,000 company-operated and licensed stores worldwide, a 6% increase from the year before. Importantly, 99% of stores in China are now open, and nearly all of them are back to regular hours of operation. Additionally, over 90% of company-operated stores in the U.S. were open at the end of May, albeit with mostly reduced hours and limited to pickup and drive-through service.
Still, Starbucks expects to have a painful third quarter, with net income in the red. However, as it progresses through the year, it expects revenue to rebound and achieve GAAP earnings per share of between $0.33 and $0.73 for fiscal 2020. Admittedly, even if it reaches the top end of that range, it would be a substantial decrease from EPS of $2.92 the year before.
Moreover, the company expects a lasting negative impact from the COVID-19 pandemic. Accordingly, it is adjusting its plans for new stores, reducing its expectation of 600 new stores in the Americas to 300 for its fiscal year. Additionally, it is planning on reformatting its footprint to cater to customer needs. The plan is to separate pickup and drive-thru locations from the stores where customers can stay and enjoy their beverage.
It will be interesting to see how the 19.4 million Starbucks Rewards members in the U.S. respond to these changes. They are the company's most valuable customers. Their reaction and spending habits at Starbucks will play a vital role in whether it can return to pre-pandemic levels of revenue and profits.
Starbucks expects positive net income for the year. Image source: Getty Images.
The final verdict
Both Starbucks and Domino's are exceptional companies that will likely increase your wealth over time if you invest in them for the long term. However, if you had to pick only one stock to buy, it should be that of Domino's. Its business has proved to be resilient through one of the worst economic and health crises of all time, whereas it appears as though Starbucks will endure some longer-term negative side effects as a result of the outbreak. Furthermore, Domino's business model is better suited to thrive in the post-pandemic environment.
Volatility will likely remain high for the rest of the year. Therefore, it would be practical to dollar-cost-average into your desired allocation of this consumer discretionary stock.
