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Will the Luckin Coffee scandal boost Starbucks’ share price?

Starbucks and it’s Chinese competitor Luckin Coffee have struggled to hit high share prices as many people aren’t buying coffee in-store, but a Luckin Coffee scandal could help boost Starbucks.

Chinese coffee provider Luckin Coffee [LK] is in hot water after admitting in early April that it had fabricated hundreds of millions of dollars of sales in 2019.

The company has established itself as a serious competitor to US rival Starbucks with 4,500 outlets in China – over double that of 2018. But how have the competitors’ share prices reacted this burgeoning rivalry?

While Starbucks [SBUX] has benefitted slightly for its staunch rival’s current issues, the global company has its own problems. Store closures and pandemic restrictions have pushed Starbucks’ share price — that had climbed throughout January — down dramatically. Its share price has dropped 11.49% for the year (through 22 April) after losing almost 25% in the first quarter.

Investors in Starbuck’s share price will be keen to see what affect the Luckin Coffee scandal — as well as the ongoing impact of the coronavirus — has had on the company’s performance when Starbucks reports its second-quarter figures on 28 April.

 

 

 

Out of luck

Earlier this month, Luckin Coffee announced that after an internal investigation chief operating officer Jian Liu and employees reporting to him had been suspended. The investigation had discovered they had made up $310m worth of sales from the second quarter of 2019 to the fourth quarter of that year.

$310million

Valuation of Luckin Coffee's fabricated sales

 

The company, which listed on Nasdaq last May at $17, saw its share price plunge from $26 on 1 April to just $6 a day later — the day the scandal was reported. The stock, which reached a high of $50 in mid-January, was also hit after Goldman Sachs [GS] said it was going to seize and sell shares from Luckin’s chairman Lu Zhengyao after he defaulted on a $518m margin loan.

Shares are currently halted for trading at $4.39 with fears that Luckin could face a market delisting and class-action lawsuit filed by shareholders. Dong Dengxin of the Wuhan University of Science and Technology’s Finance and Securities, speaking to China Daily, said the result of the lawsuit — that could even lead to bankruptcy — “may be devastating for Luckin”.

Luckin Coffee’s misfortunate, however, has given Starbucks’ share price a boost. Since the start of the month, it has risen from $62.62 to $77.45 as of 22 April.

While this increase could indicate that some investors consider the recent events to help Starbucks’ position, some remain cautious. “The two companies have had different focus areas, with Starbucks offering larger store locations similar to its worldwide network while Luckin operates smaller kiosk-sized stores,” Dan Caplinger writes in the Motley Fool. “Luckin has concentrated more on maximising order throughput and efficiency, while Starbucks has aimed to offer its coffeehouse experience.”

Starbucks also has its own issues to deal with. In the last week of March, only 44% of its stores were up and running in the US and even then the company was only offering a drive-through option. While the share price saw a boost in early April, it is still down 16.9% from a high of $93.19 in early January through to 22 April.

 

Market Cap$90.903bn
PE ratio (TTM)25.37
EPS (TTM)3.05
Quarterly Revenue Growth (YoY)7.00%

Starbucks share price vitals, Yahoo Finance, 23 April 2020

 

What analysts expect for Starbucks

“We believe Starbucks and other quick-service chains with heavy exposure to the morning daypart are underperforming as daily routines and commuting patterns are upended,” Eric Gonzalez, analyst at KeyBanc Capital Markets, says.

Analysts expect Starbucks to report sales of $5.93bn in the second quarter of 2020, down by 5.9% on the same period in 2019.

Analysts also forecast a 4.2% drop but 13.9% growth in its fiscal 2020 and 2021 revenues respectively, and an adjusted EPS of $2.05 and $2.99 in 2020 and 2021.

$5.93billion

Starbucks' predicted Q2 sales - a 5.9% decline from last year

 

Starbucks itself is wary, estimating that adjusted earnings for its second quarter will be only $0.32 per share compared to $0.60 per share in the same quarter last year. It also warned that it expects the “negative financial impacts to Q3 to be significantly greater than they were in Q2 and to extend into Q4”.

However, on a brighter note the company added that 95% of its Chinese stores were now open and that sales declines – down 64% in March – were moderating. It also highlighted the stellar growth it was experiencing pre-lockdown with US sales up 8% in the quarter to 11 March.

“We continue to believe that these extraordinary circumstances are temporary, and we expect that Starbucks will emerge from this global crisis even stronger than before,” says chief executive officer Kevin Johnson.

Bank of America [BAC] analysts have lowered their rating on the share price from buy to neutral. “We worry consumers will come out of the back of COVID-19 in a far more fragile state,” they note.

Citi analyst Wendy Nicholson is also bullish. “There is no question that COVID-19 has meaningfully pressured Starbucks’ business on a global basis in recent months, but it will bounce back in a big way over time,” she says.

“There is no question that COVID-19 has meaningfully pressured Starbucks’ business on a global basis in recent months, but it will bounce back in a big way over time” - Citi analyst Wendy Nicholson

 

There is more positivity on MarketScreener where Starbucks has an average share price target of $77.45.

The Starbucks business has been battered by this pandemic. But its brand and global reach remain strong and likely to emerge positively from the coronavirus crisis over the long term, particularly in India and China as its main competitor Luckin Coffee hits a self-induced caffeine headache.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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