Starbucks (NASDAQ:SBUX) investors beat a booming market in 2020 despite the strain that COVID-19 put on its business. The coffee giant reported a big drop in global demand starting in late February, which intensified during retailing closures in the U.S. in the spring.
The good news is that Starbucks' late October earnings report contained signs of what management called a "faster-than-expected" recovery both in the U.S and its other key market, China. Sales and earnings trends in those areas will be on the top of investors' minds when the chain reports fiscal 2021 first-quarter results on Jan. 26.
Let's take a closer look.
Getting back to growth
There's no denying that Starbucks has been on a path back to growth. Comparable-store sales in the fourth quarter, which ended in late September, fell 9% in the U.S and dipped just 3% in China. One quarter back, those declines were 40% and 19%, respectively. That U.S. metric was especially encouraging since it trounced the 12% to 17% decline executives had initially predicted.
Management sounded an optimistic tone back in October that should be reflected in the fiscal Q1 report. "I could not be more pleased with our U.S. sales recovery," CEO Kevin Johnson said in a conference call, "which progressed faster than we anticipated." Look for another key update about where growth landed in the following months as compared to Starbucks' expectations. China should have returned to growth while the U.S. business improved on its last reading of 9% declines.
Earnings are up
Starbucks has warned investors to expect the profitability rebound to lag the sales recovery by several quarters. As a result, don't look for too much of a quick improvement to the weak 6.6% operating margin that the chain managed for fiscal 2020, down from 15.4% a year earlier.
However, Starbucks managed improving margins during each month of fiscal Q4, which is a good sign for the earnings rebound that's to come. It is laying the groundwork for the boost by releasing innovative new drinks, but profitability likely will stay pressured as COVID-19 keeps a lid on traffic. Most investors who follow the stock are expecting earnings this quarter to fall to $0.56 per share from $0.79 per share a year ago.
Updating the outlook
The report will mark a great time for Johnson and his team to revisit the 2021 outlook they issued back in late October. That annual forecast described a head-turning rebound from COVID-19 lows last year with comps jumping between 17% and 22% in the U.S. and rising by as much as 32% in China. Starbucks aims to supplement those gains with over 1,100 net new store launches, mostly in China. Operating margin should nearly -- but not quite -- return to the pre-COVID-19 levels by landing between 14% and 15% of sales, executives said.
Investors are cautiously optimistic that Starbucks may nudge some of those targets higher following the Q1 report. On the other hand, management might see the volatile selling environment as a good reason to just affirm their outlook and revisit the predictions after the second quarter.
Investors likely will have to deal with more uncertainty about the chain's rebound path well into 2021. That's no reason to abandon the stock, but shareholders should brace for volatility for the time being.