The impact of COVID-19 appears to have diminished for Starbucks (NASDAQ:SBUX) as the company reopens the bulk of its locations. Still, it will be a long climb back toward pre-pandemic levels. The company has several stores in areas like college campuses, airports, and other areas that will be slower to resume operations.
Rather than wait for positive developments in the fight against COVID-19, Starbucks is proactively making a few changes to its business you will want to know about. With the company set to report its fourth-quarter, and fiscal 2020, results on Oct. 29, here are three important things investors should watch for:
Starbucks is hoping to rebound from a difficult quarter. Image source: Starbucks.
1. Look for a rebound in sales
Investors in the coffee chain will first want to see the general trajectory of sales. In the third fiscal quarter, revenue decreased by 38% as many of its locations were closed for the most part of the period. However, by the close of Q3, over 90% of its stores were reopened. As a result, the company forecasts a sequential improvement in the forth quarter. In the last earnings call, CFO Patrick Grismer said the following:
Globally, we expect comparable store sales for Q4 and for fiscal 2020 to decline between 12% and 17%, demonstrating sustained sequential improvement, including across both of our key markets of the U.S. and China. We also expect Americas and U.S. comparable store sales to be down 12% to 17% for Q4 and for fiscal 2020.
An improvement in sales will point out the resiliency of the business in the middle of a global pandemic. While many routines are being disrupted, the morning Starbucks coffee could be one routine people may not want to give up.
2. The loyalty rewards program
Second, investors need to to consider the loyalty rewards program membership. In the most recent quarter, membership decreased by 5%. Still, the company boasted 16.3 million members who are usually coffee enthusiasts who will purchase more than non-members will. Interestingly, the company started implementing a change in the rewards program in the current quarter: Users no longer have to pay with a pre-loaded card to earn rewards. Customers can now pay with debit or credit cards as part of the program, which might add new members who were hesitant to pre-load cards. An increase in this figure is a good sign for long-term investors.
3. Increasing operating margin
For the third quarter, operating margin for Starbucks was a negative 16.7%. If revenue does rebound as locations start to reopen, look for operating profits to turn positive again. Indeed, the company stated in the most recent quarterly report, "Absent significant COVID-19 relapses, we expect to return to profitability in the fourth quarter."
Starbucks is forecasting a return to profitability in the fourth quarter. Image source: Getty images.
Looking ahead
The company's fiscal third quarter will likely go down as the most severely impacted by the coronavirus pandemic. However, some of the adjustments made should remain in effect even after the pandemic has run its course. In June, Starbucks announced a plan to optimize store formats, positioning itself more toward the on-the-go consumer and away from the sit-in consumer. In the process, it expects to close 600 locations between the U.S. and Canada.
Consensus earnings per share (EPS) estimate from Wall Street analysts is $0.30 for the fourth quarter. That is above the company's guidance between $0.06 to $0.21. This consumer discretionary stock is now trading at the same level as it was at the beginning of the year. If the company can confirm that the impact of the pandemic has diminished, and better times are ahead, investors may want to put Starbucks on their list of stocks to watch.
