Starbucks (SBUX) - Get Report management team issued a letter to shareholders outlining what the financial impact the coronavirus will have on the company. The near-term impact, according to an analyst, might last longer than just the second quarter, but the worst looks to be behind the company and the stock.
Shares fell 1.69% to $74.90 Friday. It’s down roughly 20% from its 2020 high of $93, as earnings expectations have had a few isolated jolts downward to start 2020, in light of the virus.
Let’s walk through what management said, what a Cowen analyst said and what to expect from the stock.
The letter said that 80% of China stores were closed at one point during the quarter, as Starbucks was keeping employees safe and customers stayed home. Comparable sales in China fell 50% year-over-year for the second quarter, management said.
These figures will culminate in roughly $415 million in lost revenue. That’s about 6% of total company sales initially expected for the quarter, according to analysts polled by FactSet, as China accounts for about 10% of company revenue.
Starbucks isn’t losing the full 10% of revenue because it’s seeing revenue momentum pick back up for the quarter, as the company opens stores again and customers step outside. As the world has learned in the last few weeks, the virus is spreading globally, but is fortunately being contained in China.
The letter said about 90% of stores are now reopened in China, with safety restrictions and that average daily transactions in the final week of February rose 6% weekover-week. So gross sales grew 80% for that week, “reflecting the reopening of stores,” the company said.
“We are seeing early sings of a recovery with sequential improvements in weekly sales,” management said.
Starbucks had to continue paying wages for the hours that were closed and it had to continue paying regular salaries. The company also gave financial and insurance assistance to those concerned about themselves and their families.
Profit margins were therefore likely pinched considerably, which is why the earnings impact is more severe than the revenue impact is. While revenue will come down roughly 6.5%, earnings per share, the company thinks, will fall by about 32% to about 34 cents per share from 51 cents expected from analysts.
Starbucks didn’t outline its renewed full year expectations, but Cowen analyst Andrew Charles did.
Charles lowered his 2020 EPS estimate by 5% to $2.90 from $3.05 Not only did he lower is Q2 estimate, but safety restrictions and a slow return to full store openings will hurt 2020 results.
But Charles lowered his price target by more than 5% because he lowered his multiple, which reflects lowered 2021 estimates. “The worst of China Coronavirus impact sees to be behind the brand, but could be a slow climb back,” Charles said. His price target moved down 13% to $81 from $93.
Charles moved estimates of 50 store re-openings back to 2021 from 2020. On the cost side, Charles think the company will continue to incur considerable general, administrative and store opening expenses, which will likely comprise a higher portion of revenue than usual.
With lowered 2021 earnings estimates Charles lowered his multiple on 2020 estimates to 27.5 times from 30 times.
All in, the stock looks to be pricing in much of the negative impact, although the key risk that the virus continues to rage remains on the table.
Even with lowered 2021 estimates, earnings for that year could come in at an 18% growth rate, which means the stock could soon be a buy for those looking for a solid one-year gain.
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