The Worst Is Yet to Come for Starbucks, But They're Providing A Path Forward

Last week, we got to see how COVID-19 is impacting earnings from perhaps the two major players in fast-casual: Starbucks Corporation SBUX and McDonald's MCD.

Starbucks’ coffee-to-go strategy is making it ‘to-go place’ during the lockdown. By targeting the upper-scale of the coffee market, competing on comfort and amenities rather than speed and convenience, which is the case with McCafé, it seems that Starbucks has positioned itself well on the coffee throne. 

Starbucks Fiscal Q2

Net sales dropped 5% to $6 billion resulting in net income of $328.4 million, or $0.28 per share. Due to store closures, overall transactions were trimmed by 13% as global same-store sales sank 10%. But despite the miss, this wasn’t such a surprise as the company has been diligent in communicating with investors at least weekly about navigating its business through the relentless march of COVID-19 across the globe. Starbucks closed 80% of its stores in China by early February, 90% of which have been reopened. Nevertheless, the company is confident it will achieve a full recovery over time as this is a temporary impact.

While facing the same difficulties, McDonald's saw earnings fall 17% and sales fall 6% during the first quarter. 

But things are going to get even worse in the near term, as COVID-19 will have more of an impact on Q2.  As a result, the effect on revenue and operating income will be “much more substantial” in the next quarter and will likely extend into the fourth quarter.

Social Distancing Framework Ahead

As for the U.S. alone, drive-thrus helped to cushion revenues to a certain degree during the lockdown. Even better, the company laid the groundwork for the reopening stage, which clearly will involve a lot of drive-thrus, takeout, curbside delivery, even home delivery, and other options of contactless orders. Starbucks has adopted a strategy  of“monitor and adapt.” Using digital tools, it will assess the situation and tailor its services accordingly. Investors should be pleased that the company is proactive and ready to adapt to new consumer behavior. Even in the previous quarter, the company reached a 15% increase in active members of its loyalty program, showing its customer-focused approach even before this nightmare began.

Outlook

Starbucks has reported annual revenue growth for the past decade, with the latest holiday season being its strongest holiday season ever. There will certainly be significant revenue declines in the near term, but once the coronavirus impact is fully felt, recovery won’t be far off. Despite the likely weak third-quarter and maybe even fourth-quarter earnings report, the measures the company has taken to manage the crisis, along with its pre-crisis strengths are likely to eventually outweigh this year’s problems.

Moreover, Starbucks has provided valuable insight for the path the restaurant industry and society will need to take to battle these unforeseen circumstances. The coffee giant has been at the forefront of the pandemic and it is doing a great job while hoping things improve throughout May as more stores reopen. 

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