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Why Atlantic Equities Is Optimistic about Starbucks

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On Monday, Atlantic Equities initiated coverage of Starbucks (NASDAQ:SBUX) stock with an “overweight” rating and a target price of $95. Starbucks is one of the companies that was impacted significantly amid lockdowns in several countries due to the COVID-19 outbreak. However, Atlantic Equities expects that the company could emerge from the pandemic with a higher market share. Atlantic Equities also thinks that the company’s US stores will be optimized based on the change in consumer preferences.

Atlantic Equities thinks that weakness in Starbucks related to COVID-19 provides an opportunity to buy a fundamentally strong business.

Starbucks amid COVID-19

Starbucks reported a 4.9% decline in its revenue to $6.0 billion for the second quarter of fiscal 2020, which ended on March 29. The company’s worldwide comparable store sales fell by 10%. A loss of sales due to temporary store closures, reduced store hours, and lower customer traffic due to the COVID-19 outbreak hurt the company’s top line. The company’s second-quarter EPS declined 46.7% YoY (year-over-year) to $0.32.

Despite business disruption due to the pandemic, Starbucks continues to expand its store base. The company opened 255 net new stores in the fiscal second quarter. Notably, the company ended the quarter with 32,050 stores worldwide.

According to the latest guidance, Starbucks expects its comparable sales in China in the third quarter of fiscal 2020 to decline by 20%–25%. The sales will likely be about flat YoY in the fourth quarter. Overall, the company predicts a 10%–20% fall in its comparable sales in China in fiscal 2020. The guidance reflects an improvement compared to a 50% fall in the region’s second-quarter comparable sales.

Meanwhile, the company expects COVID-19 to have a more severe impact on its US business in the third quarter. Starbucks expects comparables sales for the Americas and the US to fall by 40%–45% in the third quarter and 10%–20% in the fourth quarter. The comparable sales in the Americas declined by 3% in the second quarter. Overall, the company expects a 10%–20% comparable sales decline in the Americas and the US in fiscal 2020.

Currently, about 95% of the company-operated stores in the US, 99% in China, 98% in Japan, and 88% in Canada are open.

Strategic actions and analysts’ ratings

Most of the analysts are on the sidelines when it comes to Starbucks stock. Among the 35 analysts covering the stock, 21 recommend a “hold,” 13 recommend a “buy,” and one recommends a “sell.” With a 12-month average target price of $80.47, analysts see an upside of just 3% in the stock. As of Monday, the stock was down 12.5%, while McDonald’s (NYSE:MCD) was down 4.1%.

Starbucks has been taking several transformation measures based on consumer requirements amid the new normal. On June 10, the company announced that it would accelerate the expansion of drive-thru, Starbucks Pickup, and curbside pick to meet consumers’ changing needs amid the pandemic. The company intends to transform its US store portfolio through these convenience-led formats by integrating physical and digital experiences.

Notably, Starbucks plans to add new pickup stores in dense markets like New York City, Chicago, Seattle, and San Francisco. Meanwhile, the company plans to offer convenient facilities like curbside, drive-thru, and walk-up windows in suburban areas. McDonald’s is also enhancing its delivery and drive-thru capabilities.

Expanding convenience-led formats, an extensive store network, and a strong brand name are some of the strengths that long-term investors like. Currently, the company is under pressure due to COVID-19. Starbucks expects the pandemic to hurt its third-quarter revenue by about $3.0 billion–$3.2 billion. Currently, the company expects an adjusted loss per share in the range of $0.55–$0.70 in the fiscal third quarter. In the near term, the stock might continue to be under pressure. COVID-19 fears continue to impact businesses.

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