Starbucks’ share price has lost much of its froth due to the coronavirus outbreak. Much of this is down to a slump in business in China - its second-biggest market.
Starbucks’ [SBUX] 4,300 Chinese stores serve around 7 million customers every week. Last quarter, the country represented 10% of its overall revenue. The company’s decision to shut many of its stores in China has seen the share price plummet 14% this month, while sales in the country have plunged 78%.
Starbucks has said the net effect of all this will be a hit on Q2 earnings. For traders, the question is whether the share price can now bounce back or if there are further drops in store?
Starbucks' drop in sales in China over the past month
What has Starbucks said?
Starbucks has warned investors that Q2 would see a 50% drop in same-store sales in China. At the peak of the crisis, the company closed 80% of its stores in the country. While most of them are back open, they are operating with limited services.
Before the outbreak, Starbucks was predicting it would see a 3% bump in sales from its Chinese stores.
How will this hurt revenue?
Starbucks now expects a reduction in Q2 revenue of around $400 to $430 million in China due to the outbreak. According to Zacks, non-GAAP and GAAP earnings per share are likely to drop between 15 to 18 cents.
"The estimate reflects the impact of expected lost sales for the period, as well as continued expenses related to partner wages and benefits, store operations and additional costs incurred in response to the COVID-19 outbreak," Starbucks said in a recent Securities Exchange and Commission filing.
The company also stated it had stopped opening new stores in China until the new year.
|PE ratio (TTM)||24.68|
|Quarterly Revenue Growth (YoY)||7.00%|
Starbucks share price vitals, Yahoo Finance, 09 March 2020
Is this a long-term problem?
Starbucks’ top-brass don't think so. In a letter to shareholders CEO Kevin Johnson and CFO Patrick Grismer said:
"We remain confident in the strength of the Starbucks brand and the long-term profitability and growth potential of our business in China."
In Q1 earnings, Starbucks had said coronavirus could hurt its 2020 outlook, but by how much would depend on how long stores remained shut.
“We remain confident in the strength of the Starbucks brand and the long-term profitability and growth potential of our business in China” - CEO Kevin Johnson & CFO Patrick Grismer
Starbucks is also facing stiff competition from local rival Luckin Coffee [LK]. So any delay in getting stores back to being fully operational is a problem.
Yet, it's worth noting that Starbucks doesn't expect a dip in revenue from its US operation.
How to trade Starbucks?
After such a steep selloff, Starbucks’ share price could now represent something of a buying opportunity.
“I think it’s a very attractive buying opportunity as long as people are not convinced that this entire thing will not cause a global recession or depression. And to me, the facts don’t match up to that,” said Sevens Report Research founder Tom Essaye.
“I think it’s a very attractive buying opportunity as long as people are not convinced that this entire thing will not cause a global recession or depression. And to me, the facts don’t match up to that” - Sevens Report Research founder Tom Essaye
Wall Street expects next quarter’s earnings per share to come in at $0.57, down from the $0.6 seen a year ago. Revenue is expected to come in at $6.49 billion. For income-seeking investors, Starbucks carries a 1.99% forward dividend yield.
Analysts have pinned a $93.71 average share price target on the stock. Hitting this would represent a 24% upside. Of the 33 analysts tracking the share price on Yahoo Finance, 24 rate it either a Strong Buy or a Buy. As the effects the coronavirus has had on businesses worldwide become clearer, it'll be interesting to see if analysts revise their targets in the coming weeks or stick with them.