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Starbucks Shares Surge On Narrower Q3 Loss, Solid Near-Term Outlook After Coronavirus Store Closures Hammered Sales

Starbucks noted same-store sales, while notably lower than last year, are starting to improve as the world's biggest coffee chain slowly returns to pre-coronavirus crisis traffic levels.

Starbucks Corp.  (SBUX) - Get Starbucks Corporation Report shares surged Wednesday after the world's biggest coffee chain posted a narrower-than-expected third quarter loss and noted recovery trends in key markets such as China and the U.S. following global store closures during the peak of the coronavirus pandemic.

Starbucks said its non-GAAP loss for the three months ending in June, the group's fiscal third quarter, was pegged at 46 cents per share, well inside the Street consensus forecast of 59 cents per share but sill a massive slump from last year's third quarter profit of 78 cents per share.

Group revenues were also hit hard by store closures at home and abroad during the peak of the pandemic, with sales down 38.4% to $4.2 billion, although that figure topped analysts' estimates of a $4.05 billion tally. Comparable sales were even worse, falling 41% in North America from last year, although sequential improvements from April through June softened that reading for investors and boosted shares in extended-hours trading.

In China, the group's key growth market, same-store sales were down 19% from last year, but were again improving sequentially on a month-to-month basis, with a full recovery expected in the first quarter of its 2021 fiscal year.

A solid near-term outlook, as well, added support, with the company seeing current-quarter earnings in the range of 18 cents to 33 cents per share, and comparable store sales declines easing to around 12%.

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"Pre-COVID, we had built a tremendous momentum in the business by focusing on three things, the customer experience, beverage innovation and digital customer relationships," CEO Kevin Johnson told investors on a conference call late Tuesday. "And that remains the powerful combination for us to continue to engage and drive frequency of customer visits."

"But we recognize coming through the COVID experience that everyone around the world is sharing that really, optimizing the initial store experience around these concepts of safe, familiar and convenient is what gets customers now to start -- that's kind of the on-ramp to that engagement," he added.

"Now, certainly, we're going to know a lot more 30 days from now in the US. But I think that in the number of drive-throughs we've had open without even the cafe open, we were delivering - roughly 75% of prior-year revenue in those individual stores," Johnson said. "And so that's just an indication of the power of the brand and the strength of connection that we have with customers."

Starbucks shares were marked 4.4% higher in early trading Wednesday to indicate to change hands at $77.93 each, a move that would trim the stock's year-to-date decline to around 10.8%.

"While third quarter margins and July (same store sales) trends likely exceeded expectations, we still see a long recovery road ahead," said KeyBanc Capital Markets analyst Eric Gonzalez, who carries a sector weight rating on the stock. "We believe Starbucks's scale, digital platform, innovation competencies, and forward-thinking business mentality should position it well over the longer term."

"However, we see limited near-term upside due to its elevated valuation and the prospect of a more gradual (same store sales/earnings) recovery relative to peers," he added.