When will Starbucks (SBUX) get back to full strength? With offices closed and lounging in cafes seemingly a distant memory, there's no question that the pandemic has disrupted worldwide coffee consumption habits, including the rising trend of consumers drinking more coffee at home. How will that impact Starbucks' business model in the long term?
These are some of the few questions the company will have to answer on Tuesday’s conference call with analysts. The coffee giant is set to report third quarter fiscal 2020 earnings results after Tuesday’s closing bell. Unlike previous quarters, expectations are relatively low for the premium coffee, which is the case for much of the this earnings season.
For the second quarter, Starbucks management cautioned that Q3 results could be weak, saying it expects the negative financial impacts to be "significantly greater" than in Q2 and possibly extend into Q4. With SBUX down 14% year to date and 17% over the past year, compared with 1% year-to-date drop in the S&P 500 index, investors have seemingly taken the cautious approach.
For the quarter that ended June, Wall Street expects the Seattle, Wash.-based company to to lose 57 cents per share on revenue of $4.14 billion. This compares to the year-ago quarter when earnings were 78 cents per share on revenue of $6.82 billion. For the full year, ending September, earnings are projected to decline 69% year over year to 88 cents per share, while full-year revenue of $23.14 billion would decline 12.7% year over year.
Prior to the pandemic, the company had taken on various initiatives, including expanding its delivery service, growing digital relationships and enhancing in-store customer experience have driven positive same-store-sales. On Tuesday analysts will nonetheless focus on various metrics to gauge Starbucks’ growth prospects. Last week Wells Fargo initiated coverage on Starbucks with an Overweight rating, noting the resiliency of the company's business model and sustainability of long-term sales drivers.
Prior to the pandemic, the company was consistently delivering not only double-digit revenue growth but also strong comps, including in China where it opened more than 600 new stores in fiscal 2019. Wall Street will dig into the company’s international segment, namely its China operations, to gauge reopening strategies. Amid the lack of visibility on the pace of sales recovery in the U.S., investors will focus on segment performances to determine how Starbucks is navigating the restaurant closures and managing cash flow.
Elsewhere, there will also be a focus on EPS, which is expected to decline 69% this year. Investors will want to know how long will they stay depressed. Wells Fargo, which assigns a the stock with a $92 price target, sees Starbucks beating consensus estimates on Tuesday. "Against seismic short-term (and potentially much longer term) changes in consumer behavior, SBUX's suite of digital data gathering, one-to-one marketing, and innovation capabilities,” noted the analyst.
In the long term, the firm expects the company to deliver $650 million of incremental store profit by fiscal year 2025, driven by consumer behavior. As such, But for investors with 12 to 18-month investing horizon, now could be a good time to buy Starbucks shares, particularly given not only the company’s strong execution track record, but also Starbucks' solid capital position which gives it time to navigate the phased re-openings in many states.