Starbucks acknowledges a harsh reality about life after COVID-19

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Life after COVID-19 will look differently for Starbucks (SBUX), and maybe for its investors.

A brief step-back in history first is worthwhile, however. Former Starbucks CEO Howard Schultz for years championed the coffee chain as a person’s “third place”, or that destination other than work or home you could plop down for six hours in a busy city, scrub free Wi-Fi and enjoy two large iced coffees for about $10. And you could pretty much have this experience at Starbucks locations that are seemingly everywhere. And, you could do it close to every single day — spending gobs of money each week at Starbucks — because it was so enjoyable and relaxing.

For many people, Starbucks became the local hangout that doubled as an office.

Indeed Starbucks as a third place for humans is a model that has worked tremendously well for the company. Starbucks’ sales have surged from $16.4 billion in fiscal year 2014 to $26 billion in fiscal year 2019, per Bloomberg data. Earnings per share have climbed from $1.35 to $2.92 during that stretch (helped by stock buybacks, too). The company’s store base globally has gone from 21,000 or so to more than 31,000.

Starbucks shares have subsequently soared 504% the past five years amid this sizzling growth of the world’s third place, embarrassing the 50% gain for the S&P 500.

But Starbucks execs went a long way in hinting to investors on Wednesday that the third place concept it has relied on for years to mint money may not be fully intact coming out of the COVID-19 pandemic. In other words, it won’t be back to business as usual for Starbucks.

Starbucks revealed a large number of impending closures — which are not the norm for the coffee juggernaut. The company said it will close up to 400 of its company-operated stores in the Americas over the next 18 months. A Starbucks spokesperson didn’t return a request for comment on whether the closures will include the giant Roasteries opened by the aforementioned Schultz. These stores are the ultimate expression of the third place concept (coffee making theater at its finest), but cost a ton to operate given their size (upwards of 20,000 square feet) and high-profile locations (Milan, Tokyo, etc.).

A view of the Starbucks Roastery in Milan, Italy. (AP Photo/Luca Bruno)
A view of the Starbucks Roastery in Milan, Italy. (AP Photo/Luca Bruno)

It plans to open 300 net new stores in fiscal year 2020 in the Americas, down from an original goal of 600. Meanwhile in Canada, Starbucks is eyeing up to 200 company-operated store closures over the next two years.

Moreover, the company will focus on opening up smaller to-go locations that cater more to hurried mobile order customers (aka now known as a legion of mask wearers weary of large crowds) rather than customers who want to plop down at a Starbucks table for six hours.

The moves are expected to have a “moderately negative” impact on Starbucks’ Americas sales growth through its next fiscal year.

Starbucks plans to open 500 net new stores in China this fiscal year. No store closure plans were detailed for China. The company operates 4,400 locations in the country.

‘Evolving customer preferences’

Starbucks CEO Kevin Johnson said in a new note to shareholders today the evaluation of the store portfolio has been underway the past two years.

“Our vision is that each large city in the U.S. will ultimately have a mix of traditional Starbucks cafés and Starbucks Pickup locations. With Starbucks Pickup stores located within walking distance of a traditional Starbucks café, customers can choose to enjoy their Starbucks Experience in a Starbucks café or pick up their order at either that café or a nearby Starbucks Pickup store. Starbucks Pickup stores will provide more points of presence to better serve “on-the-go” customers while reducing crowding in our cafés, thereby improving the “sit-and-stay” experience for “third place” occasions,” Johnson explained.

Johnson added, “No matter the format, we know that the Starbucks “third place” experience occurs from the moment a customer envisions their daily Starbucks Experience to wherever they enjoy that Starbucks beverage. This strategy aligns closely with rapidly evolving customer preferences that have accelerated as a result of COVID-19, including higher levels of mobile ordering, more contactless pick-up experiences and reduced in-store congestion, all of which naturally allow for greater physical distancing.”

A decision on the portfolio size and composition was likely spurred by recent trends in the business with stores opening back up. Starbucks added in its shareholder letter it expects to lose $3 billion to $3.2 billion in revenue in its third fiscal quarter because of COVID-19. On a non-GAAP basis, Starbucks estimated it will lose 55 cents to 70 cents a share in the quarter amid the nosedive in sales.

For the fiscal year, Starbucks pegs its U.S. same-store sales to drop 10% to 20%. International same-store sales are seen plunging 20% to 30% for the year.

Starbucks shares fell 5% in afternoon trading on the news.

Ultimately, investors need to ask themselves these two questions on Starbucks — because it’s clear execs have wondered the same thing judging by the store actions. Will people still want to spend hours inside a packed Starbucks with the lingering fear of getting sick? Will people keep on making their own damn coffee — and saving a nice chunk of change — as they have done the past few months of being quarantined?

The answers to those questions are very unclear at the moment and by extension, so is the earnings power of the business over the next two years. One thing is clear though: it may be a two place world for now (home and work), and a pressured Starbucks stock price medium-term as a result.

This article was originally posted on finance.yahoo.com/news/.

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