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Is Starbucks Stock a Buy?

By Anne Burdakin – Jun 24, 2020 at 8:45AM

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The coffee cooled down at Starbucks thanks to COVID-19.

Starbucks (SBUX 1.61%) has seen its stock hit hard this year. Longtime investors may feel a sense of deja vu, as the store closures and high unemployment feel a lot like the Great Recession of 2008-2009. But the company's underlying health and infrastructure should inspire investor confidence for Starbucks' future.

Just like in 2008, Starbucks is using this opportunity to close underperforming stores, refine a targeted approach, and right-size its store footprint for the future.

Starbucks adapts and innovates, but change takes time

In the last few years, the company has influenced consumer behavior with its mobile app strategy and loyalty program. The loyalty rewards program has been hugely effective, growing to 19.4 million active U.S. members, up 15% year over year in the second quarter 2020.

Consumers responded and adapted to placing pick-up orders online before the coronavirus pandemic struck, and management began plans to migrate to smaller store pick-up-only locations over the next three to five years. Pre-coronavirus takeaway comprised 80% of sales at U.S. stores. Given pandemic-driven changes to commutes and routines, Starbucks is now speeding up the increase of pick-up-only locations.

Pick-up window at a coffee shop showing a worker packing an order.

Image Source: Getty Images

While Starbucks has done well anticipating customers' mobile-ordering interest, COVID-19 served up some curve balls. Starbucks built a successful breakfast business, but with high unemployment and more remote working, there are a lot fewer people around first thing in the morning to drive breakfast business. Starbucks isn't alone in the breakfast slowdown; other restaurants, such as McDonald's are in the same boat.

The coffee giant has now reopened 95% of its U.S. stores. Same-store sales versus last year dropped 63% in April, improving to a 43% decline in May.

China is Starbucks second largest market and the first to be hit with COVID-19 closings. Now, 99% of stores are open, and more than 70% are back to full cafe seating. Same-store sales versus last year came in down 32% in April but improved in May to down 21%.

Starbucks management believes that China's comparable store sales will substantially recover by the end of the fourth fiscal quarter, resulting in a decline of about 15% for fiscal year 2020.

On June 10 Starbucks updated guidance, saying it expects a third-quarter revenue decline of about $3.1 billion because of the pandemic. The company also guided to a per-share loss of between $0.64 to $0.79, and adjusted losses per share of $0.55 to $0.79 for the current quarter ending June 28. But it expects better results in the fourth quarter, predicting net income between $0.11 per share to $0.36 and adjusted earnings of $0.15 to $0.40 per share.

Starbucks shares recently traded at $75.00, down 15% in 2020.

Is now the time to invest?

The reported improvement is good news, but investors will have to lower expectations based on the earnings forecast issued June 10. As governments lift more restrictions on restaurants, demand should pick up. But given the spiking in the number of COVID-19 cases in parts of the U.S., we can't be sure business closures are completely off the table.

Starbucks' fiscal year ends Sept. 29, so results probably wouldn't reflect any closures related to a second wave of COVID-19. Current earnings-per-share (EPS) estimates are probably already as close as possible. But getting off to a good start in fiscal 2021 is important, and that probably wouldn't happen if lockdowns begin again.

Starbucks has a solid management team and a great brand, but I think investors need to see more comeback quarters after COVID-19 before buying shares. No corner of the globe has escaped the downturn, and demand going forward is still a question mark as many Starbucks consumers are still working from home or are unemployed all over the world.

Starbucks has adapted to many challenges in the past, and I believe the company will weather the pandemic headwinds, but there is simply too much business uncertainty for investors to buy shares now.

 

Anne Burdakin has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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