Starbucks Expects 46% Drop in Q2 EPS, Comp Sales Decline

Starbucks Expects 46% Drop in Q2 EPS, Comp Sales Decline
April 10, 2020


Starbucks Corp (NASDAQ: SBUX) has warned that its FY 2020 Q2 earnings would plunge by 47% due to the COVID-19 outbreak. The coffee chain also withdrew its FY 2020 outlook. To preserve capital, the fresh-brewed coffee seller also terminated its share repurchase program but will carry on paying a dividend. Additionally, Starbuck stated that the US Comp-sales declined 3% in the second quarter. The company is expected to report its second-quarter results on April 28th. Despite the gloomy outlook, the stock gained $73.88, reflecting an increase of $2.31 or 3.23% from the prior close. As of yesterday’s close, the stock has depreciated by roughly 15% this year.

In an open letter to shareholders by Keving Johnson, CEO of Starbucks, and Pat Grismer, CFO, the company issued an update regarding the impact of coronavirus on its business.

The Seattle, Washington-based company now expects to post earnings of $0.28 per share in 2Q20. On an adjusted basis, earnings are anticipated to be $0.32 per share, a decline from $0.60 a share in the prior-year period.

The company explained that the adjusted earnings have taken all other expenses into account: “This includes inventory write-offs, honoring supplier obligations, store safety-related items, asset impairments and preliminary estimates of certain government stimulus program benefits.”

The seller of hot and iced espresso beverages also withdrew its FY 2020 outlook, pointing to the variable characteristics of the coronavirus issue. The company’s FY 2020 revenue was anticipated to increase between 6% and 8%, and worldwide Comp sales growth is expected to be between 3% and 4%.

Starbucks stated that the US Comp sales decline in 2Q20 mirrored “the very rapid onset of COVID-19 business impacts in the final three weeks of the quarter.” Notably, up to March 11, the quarterly Comp sales in the US increased by 8%.

The sales in the US started declining from March 12th and consistently deteriorated as it shifted to serve only through delivery and drive-thru. In the final week of the month, Comp sales plunged between 60% and 70%. The US and Canadian employees will get paid until May 3rd, even if baristas are not operating. Employees who opt for working will be paid an extra $3 per hour.

Starbucks also recorded a 50% drop in Comp sales in China, the company’s second-largest market. The company pointed to temporary shutdowns, a decrease in working hours, and a decline in consumer traffic as the main reason for the drop in same-store sales.  The company revealed that Comp sales have been getting better since they plunged 90% in mid-February as the nation limps to normal. Starbucks stated that the closures in China resulted in a revenue loss of $400 million, thankfully at the lower end of the forecast range.

The letter also explains that the actions taken in China and South Korea have resulted in considerable improvements: “The actions we took in China, beginning in late January, contributed to the steady business recovery we are experiencing, with over 95% of our stores now open, though many are operating with reduced hours and limited seating in compliance with local guidelines. We are encouraged to see similar improvements underway in South Korea, which reinforce both the resilience of our brand as well as our success in replicating our recovery model across markets as people are able to return to their daily lives and work.”  

CEO Kevin Johnson and CFO Pat Grismer, in a letter to shareholders, warned that the growth may not be in a straight line and will be affected by the existing external situation and domestic safety rules.

Starbucks has assessed that the interruption to its Chinese business due to COVID-19 disease has shaved off $0.15 to $0.18 per share from Q2 earnings. The company also stated that it is temporarily suspending its share repurchase program. Johnson supported the program in mid-March after the Board approved 40 million shares buyback program. The company does not foresee any need to suspend or trim dividends at this point in time.

Johnson and Grismer, however, are confident that the company will not face any difficulty in maintaining adequate liquidity while steering through the prevailing crisis.

Johnson and Grismer wrote: “We are navigating this dynamic situation while staying true to the mission and values of Starbucks, including transparency. This includes sharing preliminary financial results in this communication, ahead of our Q2 earnings report on April 28.”

The CEO and CFO also believe that the reversals are temporary, and “we will overcome these challenges together.”

The executives were not willing to issue forecasts about upcoming quarters due to the unresolved coronavirus issue. The letter reads: “Given the dynamic nature of the COVID-19 crisis and how it is affecting our business globally, we are currently unable to estimate the full financial impacts beyond Q2 with reasonable accuracy.”

The weak Q2 outlook is expected to turn the stock range-bound with bearish bias in the short-term.

The price chart indicates that the stock remains range-bound between 55 and 95. The MACD indicator has a negative reading. Additionally, the stock is also trading below its 50-day moving average. Therefore, we are expecting the stock to retest the support level of 55 in the days ahead.

sbux - technical analysis - 10th April 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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