Starbucks Q2 Earnings Preview: Still A Solid Recovery Bet Despite Plunging Sales

* Reports Q2 2020 results on Tuesday, April 28, after the market close
* Revenue Expectation: $5.91 billion
* EPS Expectation: $0.34

Popular coffee-chain operator Starbucks (NASDAQ:) was among the earliest global companies to fall prey to the coronavirus pandemic. Its fiscal 2020, second-quarter report will reveal just how big the shock to its operations has been.

U.S. same-store sales growth — a key metric for restaurants — was 8% in the quarter through March 11, the company said in a filing early this month. By the end of March, sales had declined between 60% to 70%, as the company closed many of its North American stores and limited operations in those that remained open.

Starbucks its fiscal second-quarter earnings to be slashed by almost half as the coronavirus pandemic causes sales to plunge in its two largest markets — the U.S. and China.

The global coffee chain also withdrew its outlook for fiscal 2020, citing the “dynamic nature” of the coronavirus crisis. Its fiscal 2020 revenue had been expected to rise between 6% and 8% and global same-store sales growth had been forecast to be in a range of 3% to 4%.

The prospects for food chains, including Starbucks, remains uncertain in the post-pandemic world where some consumers are likely to alter their behaviour permanently and avoid visiting restaurants. Starbucks has warned investors that the next two quarters will be quite painful.

Starbucks shares are down 14% so far in 2020, though less than many restaurant peers. They closed on Thursday at $75.15, offering an annual dividend yield of 2.12%.

A Solid Recovery Bet

Despite this gloomy picture, the Seattle-based chain is a good recovery bet to make among the top restaurant stocks. First, there’s little to suggest that the company’s fundamental business model is under threat, besides the temporary devastation caused by the COVID-19 outbreak.

The coffee-chain has been a fantastic consumer stock during the past five years, delivering significant gains to its investors. In North America, Starbucks grew robustly due to its technology-driven innovation, customer reward initiatives and improved store formats.

On the strategy side, Starbucks remains well on course as the chain wins back coffee-drinkers not only in its home markets, but also in China — a country which has taken center stage in its growth strategy. Starbucks’ rewards loyalty program grew to 18.9 million active members in the U.S., up 16% year-over-year during Q1.

Once things get back to normal, the company is in a great position to resume its growth trajectory, especially in China where its business is likely to get a boost after troubles at its biggest competitor.

Luckin Coffee (NASDAQ:), the fast-growing Chinese coffee chain, has been embroiled in an accounting fraud, triggering an 80% plunge in its share price. The chain was aiming to reach 10,000 locations by the end of 2021, a goal that may now be unattainable after the financial scandal.

Another reason that makes Starbucks an attractive long-term stock to own is the company’s strong cash position. In its latest filing, the company disclosed that it has $2.5 billion in cash and $3.5 billion in short-term borrowings, giving it enough liquidity to get through the tough times.

Measures the company has taken in response to the crisis include temporarily suspending its share repurchase program, deferring capital expenditures and reducing discretionary spending to give it more flexibility. The coffee chain does not expect to reduce its quarterly dividend of $0.41.

Bottom Line

Starbucks continues to remain an attractive buy-and-hold candidate due to the company’s enviable cash reserves and its ability to defend its market share and recover quickly once the pandemic is contained. Investors should take advantage of any further weakness in its shares to build a long position.

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