Welcome
Pharmaceutical & Life Sciences News

Starbucks Sees 6 Months of Pain, Based on Its China Experience

April 8, 2020, 10:51 PM

Starbucks Corp. said that a sharp slowdown from the coronavirus pandemic will worsen before getting better, with financial impact extending as far as September.

The company based its assessment on the tentative recovery in the Chinese market, Starbucks’ most important along with the U.S. The coffee chain went through social distancing and mandatory closures in the Asian nation earlier in the year, giving the company an early glimpse at how the situation would play out in the U.S. and elsewhere.

U.S. same-store sales growth -- a key metric for restaurants -- was 8% in the quarter through March 11, the company said in a filing. That was the strongest pace in four years, but was derailed as the pandemic spread. By the end of the month, sales had settled into a decline of 60% to 70%. The company withdrew its forecast for the year.

While the outlook is dark for the time being, Starbucks is framing the future much as Nike Inc. did last month, saying its experience in China shows the financial suffering is temporary and can be reversed. There, Starbucks said recovery went at a “slightly faster pace” in March and there’s evidence that its business will “fully recover over the next two quarters.”

Starbucks’ U.S. experience is similar to that of McDonald’s Corp., which earlier today announced a dramatic contraction in March after what had been a healthy pace of sales. As the pandemic limits restaurant operations, the biggest companies with the most cash, as well as delivery and carryout operations, may be the best positioned to weather the storm.

Enough Liquidity

Starbucks said it has $2.5 billion in cash and $3.5 billion in short-term borrowings, giving it enough liquidity to get through the tough times. The company temporarily suspended its share repurchase program and will defer capital expenditures and reduce discretionary spending to give it more flexibility. The coffee chain, which will give a full earnings report on April 28, does not expect to reduce its quarterly dividend.

Starbucks shares fell as much as 4.3% in late trading before paring some of the drop. The stock has fallen 13% so far in 2020, less than many restaurant peers.

Michael Halen, an analyst at Bloomberg Intelligence, said the 60% to 70% sales decline at the end of March in the U.S. is likely similar to what April’s numbers will look like.

He said that investors may be overlooking the slow pace of recovery for restaurants in general, noting that Starbucks’ China sales were still down 42% in the last week of March in spite of seven straight weeks of improvement.

“If investors start extrapolating that to the United States restaurant industry, and at the end of May sales are still down 42%, that’s a problem,” Halen said.

To contact the reporter on this story:
Ed Ludlow in San Francisco at eludlow2@bloomberg.net

To contact the editors responsible for this story:
Anne Cronin at acronin14@bloomberg.net

Jonathan Roeder, Crayton Harrison

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

To read more articles log in. To learn more about a subscription click here.