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Starbucks Stock Falls Due to Weaker Fiscal 2020 Outlook

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On April 28, Starbucks (NASDAQ:SBUX) reported its results for the second quarter of fiscal 2020 after the market closed. For the quarter, the company reported an adjusted EPS of $0.32 on revenue of $6.0 billion. The company beat analysts’ sales expectations of $5.89 billion but missed the EPS expectation of $0.34. Meanwhile, Starbucks’s SSSG fell by 10% during the quarter due to COVID-19. Also, the company’s management warned that the outbreak could have a significant impact on its financial performance in the third quarter, which led to a fall in the company’s stock price. Starbucks was trading 1.4% lower in today’s pre-market trading hours.

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Starbucks’s revenue falls

For the second quarter, Starbucks reported revenue of $6.0 billion—a fall of 4.9% from its revenue of $6.31 billion in the second quarter of fiscal 2019. The decline in the company’s global SSSG of 10% dragged the revenue down. However, adding new restaurants and growth in the Channel Development segment’s sales offset some of the declines.

Looking at the segmental performance, Starbucks’s Americas segment reported revenue of $4.33 billion—a rise of 0.4% from $4.31 billion in the same quarter last year. The net addition of 275 company-owned restaurants and 277 franchised restaurants in the last four quarters led to a rise in the company’s stock price. However, amid COVID-19, Starbucks’s SSSG fell by 3%. During this period, the transactions declined by 7%, while the check size increased by 5%.

Before the outbreak, the company’s same-store sales rose 8% with its transactions increasing by 4%. However, in the last three weeks of the quarter, Starbucks had to close half of its company-owned restaurants. The remaining restaurants only offer delivery and drive-through services, which led to a huge decline in its sales.

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International and Channel Development segments

During the quarter, the International segment took a big hit. The segment’s revenue fell by 25.8% to $1.13 billion. A decline of 31% in the segment’s SSSG dragged the company’s revenue down. During this period, the company’s transactions declined by 32%, while its average check size increased by 1%. However, some of the revenue declines were offset by the net addition of 358 company-owned restaurants and 1,056 franchised restaurants. China, which witnessed the greatest impact from COVID-19 during the quarter, reported a 50% decline in its SSSG.

Moving to the Channel Development segment, Starbucks reported revenue of $519.1 million—16.2% growth from $446.6 million. The growth was driven by the expansion of the Global Coffee Alliance, where the company sold additional products to Nestle. Also, the company continued to offer its ready-to-drink products in grocery stores, convenience stores, and online through its partners Pepsi and Tingyi. However, the sales of the Tazo brand to Unilever offset some of the increases.

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Starbucks’s EPS falls

For the quarter, Starbucks reported a diluted EPS of $0.28. However, the adjusted EPS was $0.32, which was a fall of 46.7% from $0.60 in the same quarter last year. A decline in the revenue, the lower adjusted operating margin, and higher interest expenses dragged the company’s EPS down. Meanwhile, a lower effective tax rate and decline in the number of shares outstanding offset some of the declines.

During the quarter, Starbucks’s adjusted operating margin declined by 6.6% to 9.2%. In the Americas segment, the company’s adjusted operating margin fell to 14.4% compared to 20.3% in the same quarter of the previous year. The sales deleverage from negative SSSG and increased expenses related to employees’ pay and benefits, inventory write-offs, and store safety supplies dragged the segment’s operating margin down. For the International segment, the company’s adjusted operating margin declined from 19.3% to 3.9%. Along with the above-mentioned factors, increased packaging costs and higher commission due to more delivery sales had a negative impact on the segment’s margins. Meanwhile, the Channel Development segment’s adjusted operating margin increased by 3.6% to 37.8%.

During the quarter, Starbucks’s interest expenses increased from $73.9 million to $99.2 million. However, the company’s effective tax rate declined from 19.7% to 16.8%. Also, the weighted average shares outstanding declined from 1.25 billion to 1.18 billion.

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Outlook

Starbucks withdrew its guidance for fiscal 2020 earlier this month. Yesterday, the company announced that China is in the recovery phase. However, the US, Japan, and Canada are still in the early phase of their response to COVID-19. So, the company’s management added that it can’t provide any guidance for the fiscal year at this point.

Meanwhile, the company’s management added that 98% of its restaurants in China are operational. Restaurants are only closed where restrictions are in place. However, management expects the SSSG to improve in the second half of this fiscal year. The company’s SSSG could improve to a decline of 25%–35% in the third quarter. Eventually, the company could reach flat SSSG by the end of the fourth quarter. For fiscal 2020, Starbucks’s management expects its SSSG in China to decline by 15%–25%. The company expects to open 500 restaurants in China this year compared to the earlier guidance of 600 restaurants.

In the US, Starbucks opened 50% of its company-owned restaurants and 46% of its franchised restaurants. Management expects to open 90% of its restaurants by early June. Meanwhile, management continued to emphasize its drive-through and delivery sales. Since the beginning of April, the company’s SSSG has declined by 25%. So, the company expects its third-quarter financial performance to be significantly lower than its second-quarter performance in the US. Management expects the revenue from its Channel Development segment to fall by 6%–8% this fiscal year.

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