The initial lockdown phase of the COVID-19 pandemic decimated Starbucks' (SBUX -1.20%) business earlier this year. With many cafes closed and others open only for takeout, comparable sales declined as much as 65% in the U.S. -- Starbucks' largest market -- back in the spring.
However, Starbucks' fiscal fourth-quarter results, released late last week, showed that the coffee giant is bouncing back quickly. Indeed, the pandemic has accelerated strategy shifts at Starbucks and changes to the industry landscape, increasing the company's potential for long-term earnings growth.
Strong sequential improvement
During the third quarter of fiscal 2020 -- the period ending in late June -- temporary store closures and lower traffic at stores that remained open pressured Starbucks' results. Revenue plunged 38% year over year on a 40% decline in comparable store sales. That caused Starbucks to swing to an adjusted net loss of $0.46 per share, compared to adjusted earnings per share of $0.78 in the prior-year period.
By contrast, most stores had reopened by the fourth quarter. Furthermore, customers developed new routines, e.g. picking up coffee at a suburban Starbucks drive-thru in the mid-morning rather than walking into an urban cafe to buy coffee on the way to work. Starbucks also leveraged its strong digital platform to encourage customers to visit more frequently.
As a result, global comp sales declined just 9% last quarter, including a 9% decrease in the U.S. and a mere 3% drop in China. Both of these markets achieved strong sequential improvement as the quarter progressed. Starbucks' domestic performance was particularly noteworthy. Back in July, management had estimated that comp sales would fall 12% to 17% in the U.S. during the fourth fiscal quarter.
Starbucks' stabilizing top line allowed it to return to profitability, posting adjusted EPS of $0.51: down 27% year over year. This easily exceeded the company's quarterly EPS guidance of $0.18 to $0.33.
Management expects a quick return to growth
In the month of September, comparable store sales turned positive in China and for Starbucks' suburban stores in the U.S. Total comp sales in the U.S. declined just 4% in September. Recent results give management confidence that sales trends will continue to strengthen in China and will reach pre-pandemic levels in the U.S. by the end of the second quarter of fiscal 2021 (i.e. March).
Based on this optimistic outlook and the extremely easy comparisons Starbucks will face in the upcoming year, the company expects comp sales to increase 18% to 23% in fiscal 2021, including 17% to 22% growth in the U.S. and 27% to 32% growth in China. The guidance calls for adjusted operating margin to recover to between 16% and 17%: down slightly from 17.2% in fiscal 2019. Full-year adjusted EPS should land between $2.70 and $2.90, near pre-pandemic levels.
In another sign that the company expects business trends to continue improving, Starbucks boosted its quarterly dividend by 10% starting with this month's payout.
Starbucks' outlook assumes that it will be able to continue restoring indoor seating at its cafes in the months ahead. With COVID-19 case numbers rising quickly in the U.S. and much of Europe, it wouldn't be shocking if Starbucks experiences a sales setback in the months ahead. That said, the quick sales recovery in recent months proves that there's still plenty of demand for Starbucks' offerings, which bodes well for its post-pandemic performance.
The long-term growth trajectory is intact
There are several reasons to be optimistic that Starbucks will exit the pandemic stronger than ever. First, the retail apocalypse is creating abundant real estate opportunities and should allow the company to find excellent sites for new stores at lower rents.
Second (and relatedly), the abrupt change in consumer habits has encouraged Starbucks to aggressively realign its store portfolio in the U.S. and Canada. It is opening more drive-thru locations, particularly in the suburbs. In dense cities, it is starting to open small-format Starbucks Pickup stores geared toward people who order ahead. Meanwhile, it will close 800 stores in the U.S. and Canada during fiscal 2021: mainly underperforming locations in dense cities where sales can easily be transferred to nearby stores.
Third, Starbucks is poised to gain market share as the pandemic forces many independent coffee shops to shut down. Starbucks' heavy investments in drive-thru and digital initiatives give it a huge advantage over local coffee shops, especially in the current environment.
In short, while there could be a few more bumps on the road to recovery, Starbucks is likely to return to strong, sustainable growth before long. While Starbucks stock has recovered most of its losses from earlier this year, there's still plenty of upside potential here for long-term investors.