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Starbucks Feels The Pain; Expects 46% Fall In Earnings, Pulls Full Year Guidance

Starbucks (SBUX) is expecting FQ2 adjusted earnings of $0.32 per share, almost half the $0.60 reported in the same period last year, due to the severe impact of the coronavirus pandemic. Starbucks also revealed that business disruption related to COVID-19 in China had an adverse impact to GAAP EPS for Q2 of $0.15 to $0.18.

However, the coffee chain warned that worse is still to come. “Based on the late-quarter onset of COVID-19 impacts to our business results in the U.S. and other markets globally—and as the flow-through impact of lost sales in the U.S. is materially greater than the flow-through impact of lost sales in China—we expect the negative financial impacts to Q3 to be significantly greater than they were in Q2 and to extend into Q4.”

As a result, Starbucks withdrew its full year guidance- but reassured investors that it continues to believe these impacts are temporary and that its business will fully recover over time. And while the company has suspended its share repurchase program, it does not expect to reduce the quarterly dividend.  

Meanwhile comparable store sales in the U.S. were down approximately 3% in Q2 versus the prior year, reflecting the very rapid onset of COVID-19 business impacts in the final three weeks of the quarter.

Indeed, until the second half of March SBUX was delivering a stellar performance- building on a very successful holiday quarter. Quarter-to-date through March 11, U.S. comparable store sales growth was 8%, with comparable transaction growth of 4%. 

Following the news, Citigroup analyst Wendy Nicholson initiated coverage of Starbucks with a buy rating and $82 price target (15% upside potential).

She told investors: “There is no question that COVID-19 has meaningfully pressured SBUX’s business on a global basis in recent months. While the company has not updated its guidance to reflect the pandemic, our best estimate at this time is to forecast a 5% drop in FY20 revenues (year-end September) and a ~19% drop in FY20 EPS. However, we are optimistic that SBUX will return to growth next year, as we forecast 16% revenue growth and 32% EPS growth in FY21.”

Nonetheless the majority of analysts covering SBUX remain sidelined on the stock. TipRanks shows that in the last three months, Starbucks has received 15 hold ratings vs 10 buy ratings. Meanwhile the $81 average analyst price target indicates upside potential of 13% from current levels. (See Starbuck’s stock analysis on TipRanks)

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