Starbucks (SBUX 1.00%) is scheduled to report fiscal 2022 second-quarter earnings on Tuesday, May 3. The international coffee giant is grappling with more COVID-19 disruptions in its second-largest geographic market, China.
The massive country has locked down some of its biggest cities due to coronavirus outbreaks. The government has maintained a stricter policy during the pandemic. It aims to limit the spread of the potentially deadly virus more vigorously than other governments, which have conceded they cannot contain it and have instead tried to limit the number of severe illnesses.
When Starbucks announces earnings, investors hope the impact of lockdowns on the business will be minimal. Let's look at its potential impact.
Image source: Getty Images.
China holds strategic importance for Starbucks
As of Jan. 2, Starbucks boasted 34,317 locations worldwide. Of that total, the U.S. and China were the countries with the two most significant concentrations with 15,500 and 5,557, respectively. Even though China is the second-largest in geographic importance, it is roughly one-third the size of Starbucks' U.S operation.
SBUX Revenue (Quarterly) data by YCharts.
Moreover, there is a stark contrast concerning total revenue between the two regions. In its most recent quarter, which ended Jan. 2, U.S. revenue totaled $5.3 billion or 23% higher than the year-ago period. Meanwhile, revenue from China was $897 million or a decline of 2%. To put those figures into better context, the overall revenue for Starbucks was $8.1 billion in the first quarter.
As crucial as the China market is for Starbucks in the long term, for now it comprises just a little over 10% of revenue. So even if lockdowns slow revenue in China, they are not likely to significantly impact the company overall. Additionally, Starbucks announced a partnership with a third-party delivery provider in China in January, perhaps with excellent foresight. Customers in China can now access Starbucks through Meituan, the largest food-delivery platform in the country with more than 660 million users.
What this could mean for Starbucks investors
Analysts on Wall Street expect Starbucks to report revenue of $7.6 billion and earnings per share of $0.59. If the company meets those projections, it will represent an increase of 15% and a decrease of 4.8%, respectively, from the same period the year before.
SBUX Price to Free Cash Flow data by YCharts.
The decrease in earnings comes as the company faces rising costs throughout the business, especially for labor. Investors worry that inflation will continue taking a bite out of profits and have shunned the stock. That's created the opportunity for long-term investors to scoop up shares of the coffee giant at its near-lowest price-to-earnings and price-to-free-cash-flow ratios in the last several years.
Starbucks has headwinds to overcome in the near term, but the stock has arguably already paid the price, down 35% off its high last year. Investors can feel good about buying Starbucks stock right now.
