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Apr 8, 2020

Starbucks sees 6 months of pain, based on China experience

A barista pours frothed milk into a drink inside a Starbucks Corp. coffee shop in New York. Photographer: Victor J. Blue/Bloomberg

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Starbucks Corp. said that adverse conditions from the global coronavirus pandemic will worsen, with “negative financial impacts” in the fiscal third quarter, which ends in June, being “significantly greater” than the prior three-month period and extending to the end of the fiscal year.

Same-store sales growth -- a key metric for restaurants -- was 8 per cent 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. The company withdrew its forecast for the year.

Key Insights

  • While the outlook is dark for the time being, Starbucks is framing the future much as Nike did last month, saying its experience in China shows the financial suffering is temporary and can be reversed. There, the company 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.”
  • Like much of the restaurant industry, Starbucks is looking to boost its liquidity as sales slow down dramatically amid mandatory closures. The company says it has temporarily suspended its share repurchase program, will defer capital expenditures and reduce discretionary spending to give it flexibility. The company does not expect to reduce its quarterly dividend.
  • Starbucks’ experience is similar to that of McDonald’s, 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, and delivery and carryout operations, may be the best positioned to weather the storm. Starbucks said it has US$2.5 billion in cash and US$3.5 billion in short-term borrowings, giving it enough liquidity to get through the tough times.

Market Reaction

  • Starbucks shares fell as much as 4.3 per cent in late trading.