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Starbucks Proves a $5 Coffee Is No Luxury

By Jeremy Bowman - Jan 29, 2021 at 6:52AM

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Even during a global pandemic, almost no one's skipping out on Starbucks.

Skip the Starbucks (SBUX 3.87%) coffee every day and you'll be rich. That's become a personal finance cliche, and if there was a time to take that advice to heart, it would be now.

Americans and people in much of the world are working at home, avoiding the usual routines that lead to your morning coffee, or grabbing a cup of joe on your break, or any of the other situations that favor Starbucks' business. But against that backdrop, Starbucks has proven that its business is resilient, as it's recovered virtually all of those lost sales during the pandemic.

A Starbucks barista smiling in the dining room

Image source: Starbucks.

In the just-reported first fiscal quarter, global comparable sales declined just 5% with a similar slide in the U.S. That's a remarkable recovery from the company's performance during the worst of the pandemic, when the lockdowns were in effect last spring. In that quarter, it reported a plunge in global comparable sales of 40% and a sizable loss. 

We'll get to how Starbucks managed its turnaround in a second, but let's review some other key figures from the quarter.

  • China comparable sales rose 5%, showing that Starbucks' second-biggest market has fully recovered from the pandemic.
  • The company opened 278 net new stores, bringing its grand total to 32,938. 
  • Revenue fell 4.9% to $6.75 billion, below the analyst consensus at $6.93 billion.
  • Adjusted earnings per share declined from $0.79 to $0.61, which beat expectations at $0.55.

Adapt or die

Starbucks' recovery from the early days of the crisis is a reminder that great businesses are able to adapt to new challenges.

The most popular Starbucks use cases may be the kinds of things that have been constrained by the pandemic, like meeting a friend for coffee, working from a cafe, or picking up a beverage during a morning commute., a location data firm, notes that Starbucks' business in city stores and morning visits has fallen off, but the company has found plenty of other ways to make a sale.

Its mobile order and pay business, which the company rolled out a few years ago, has driven much of the recovery along with its drive-thru stores. CEO Kevin Johnson noted on the earnings call that more than half of sales in the U.S. are coming from drive-thru stores, and that the company generated positive comparable sales from drive-thru stores during the quarter. Additionally, Starbucks' loyalty program has been a key source of growth and customer retention, as active Rewards members rose 15% to 21.8 million.

Starbucks' business has changed during the crisis, as average transaction value was up 17% with a comparable decline in transactions of 19%, showing more group ordering during the quarter as well as more premium beverage and a higher food attach rate. Customers are looking to Starbucks for convenience and an affordable luxury, and the company has reoriented its business to meet changing demands.

Starbucks is essential

The java giant's stock was trading near all-time highs before the earnings report, indicating the recovery was already priced in. Management had indicated as much in its December Investor Day conference.

However, Starbucks' recovery should also reassure investors who may have doubted that the company can thrive even in a world where remote work becomes the norm. It's the dominant consumer brand in coffee, and it turns out that even a cup of Starbucks is essential during the pandemic.

The good news for investors is that Starbucks' performance will benefit this year from lapping the worst of the crisis a year ago. Management expects global comparable sales up 18% to 23%, or an increase of about 25% to 30% for the remaining three quarters in the fiscal year. It sees 2,150 new store openings and 1,100 net new stores globally, the vast majority of which will be outside America, and on the bottom line, it expects adjusted earnings per share of $2.70 to $2.90, in range with the $2.83 it posted in 2019 and much better than the $1.17 from last year.

For the quarter ahead, Starbucks sees comparable sales growth returning, signaling that the worst of the pandemic has clearly passed. Starbucks proved again why it has been one of the best consumer stocks to own for the last generation.

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