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Starbucks: A Pricey Play On A 2021 Recovery

May 04, 2020 6:07 PM ETStarbucks Corporation (SBUX)16 Comments


  • Q2 numbers were, expectedly, negative; however, the extent to which same-store sales are declining in April was a negative surprise.
  • The China recovery is taking shape, with a nine-month recovery on the cards.
  • Starbucks is well-positioned to weather COVID-19, but this has largely been embedded in the price.
  • At 25-30x normalized EPS, the stock offers investors little margin for error.

Starbucks (NASDAQ:SBUX) is admittedly an industry leader with clear competitive advantages, but even it may not be immune to what I believe will be a shift in consumption habits, not only in the US but globally. To be clear, I do not think consumption habits are broken, but it may take time to rebuild. At 25-30x normalized EPS, the stock is pricey and offers investors little margin of safety should a second COVID-19 wave materialize. Thus, despite my admiration for the brand, I think the stock price, at current levels, may have moved too far too fast, and thus, I would hold off on SBUX for now.

Steep Declines Across Geographies

Though expectations were low coming into the quarter, the true extent of the COVID-19 impact on Starbucks' numbers across the Americas was certainly a surprise for me. On the one hand, the March quarter saw a relatively benign impact, with a 3% decline in same-store sales (SSS), largely driven by a 7% decline in transactions.




















Source: Company Data

In April, however, US company-operated SSS is currently running at -25% for April, with overall SSS at -60-70% and half of the store base closed at present. Management has guided toward a material improvement to SSS numbers upon the staged openings of stores from May 4th, with a targeted 90% of the store base expected to reopen by June. I would note, however, that the guide incorporates only 30 open cafes reopening, though these stores will not have seating.

So since the third week of March when we initiated widespread closures of stores in the US, we've seen the comps which include the impact of closures based on how

This article was written by

Analyst with a keen interest in the global markets, always sifting through company filings in search of compelling opportunities. Approach is heavily centered on the notion that one needs to be non-consensus right in making investment decisions. A keen follower of value investing legends such as Peter Cundill, Seth Klarman, and more recently, Rupal Bhansali.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (16)

imalakepapa profile picture
People return to old habits when things go back to "new normal".
A Few OTM calls have served me well. Buy when people are fearful......TY Mr. Buffett.
sabedford profile picture
Leverage scares me. Never want to lever up at the top of a economic cycle....crazy they do not have any cash given how long the cycle has lasted. Buying back an expensive asset to keep share count flat seems like a bad strategy. Thanks for the article!
yazzer profile picture
Bought at 62 basis and have been selling OTM covered calls to hedge. SBUX will be fine long term, just have to navigate the shoals.
mschratter profile picture
You describe yourself as 'long only'. And so it begs the question: 2021 isn't long, right?

SBUX is my largest long term holding. I have little interest in its daily ups and downs for I am convinced on the positive long term potential of this company. I am no day-trader. I invest in my future, I think long term. So with that said, I say that anyone that is waiting for Starbucks to crash and burn is suffering from wishful 'short' predictions. I have been a long on SBUX and for the last dozen years or so. And during the inevitable dips, I buy. (Like now!)

SBUX is about selling a legalized drug (caffeine), that is cut beautifully with other legalized drugs (fat and sugar), all tight together in the right emotional packaging.

Not all of us are stupid enough to buy expensive cars on credit or over-extended ourselves with houses we couldn't afford, but we all seem willing to buy a $4 cuppa joe. We all know that their drinks are over-priced and yet every day millions of us throw out our financial common sense and allow ourselves this little perk that has us believing that we are rich, hip, and worth it.

And in China, it even gets better. The Asian nouveau riche love status symbols that show off their wealth. Holding a Starbucks cup while walking around a shopping mall allows others to see you have made it. (The fact that your tongue loves the fatty sweet liquid and your neural system physiologically craves the stimulant are just secondary bonuses!) I read an article about this phenomenon getting so extreme that some people are willing to fill up a used Starbucks cup with cheap coffee just so they can feel the psychological benefit of seeming elite.

China's SBUX growth continues to hit 6-7% in a nation that is creating millionaires by the dozen every day. We are witnessing 1.3 billion people just beginning to go from rural to urban, from dirt poor to lower-middle class. Anyone that bets against this trend is missing the forest for the trees.

And SBUX has barely started in Europe, South America, and India. As the world becomes more westernized, global and wealthier, one can potentially see a Starbucks in every other town with a population 50,000 or greater. The planet has a lot of such towns. As McDonald's was once synonymous with the fast-food burger in North America before it became so globally, so Starbucks will be with coffee.

So unless you are a trader, quit trying to find the bottom or time the markets. Buy SBUX and hold it for 10 years. Then laugh all the way to the bank.

Ps. Did I mention that outside of this unique time of the pandemic, SBUX continues to open about 1200 stores per year? That's roughly 4 per day.
Investing for Freedom profile picture
I am with you. Buy and hold until decades towards the future!
I don't think long only means what you think it means. Author's tone was quite balanced. My 0.02
"SBUX is about selling a legalized drug (caffeine), that is cut beautifully with other legalized drugs (fat and sugar), all tight together in the right emotional packaging."

well said
seonmoolee profile picture
Starbucks is an awesome company with a huge brand moat, great margins for the industry, and solid balance sheet. My only concern is the growing political tension between US and china, and how that will affect their business in china. Starbucks has cited the Chinese market as the key region for future growth for the company. Apparently, Americans drink 300 cups of coffee per year vs 4 cups/year in china. So the potential for growth is obvious. However, the growing tensions between US and china, which has been much exacerbated due to the covid-19, should concern investors. I can easily see the growing anti-american sentiment in china affecting starbucks as people boycott american products as a whole. In 2012, due to the Senkakus dispute, chinese people boycotted Japanese goods. The Japanese automakers were the most affected during this incident. Furthermore, the CCP can make the conducting of business more difficult or impossible for starbucks. In 2017 when Korea agreed with the US to place the THAAD missile systems on the Korean peninsula, China retaliated not on the political sphere, but by placing sanctions on Korean pop culture content, which severely impacted the beauty products industry. I am by no means suggesting that these events will occur, but I do think that as an investor these risks are something to consider when looking at starbucks.
kenski profile picture
"however, the extent to which same-store sales are declining in April was a negative surprise"

Seriously? A surprise to who? You did realize people have been sheltering in place in April.

No matter how bad it is... as he economy re-opens, SBUX will recover as fast as anyone.
I agree! Now is not the time to jump in.
Investing for Freedom profile picture
Oddly I am still buying more shares.
Yep, me too. People will always be addicted to their Frappuccinos & Lattes (an easy & low ticket consumer spend) whether they drop in at a store to get one, or drive thru. (They will also keeping buying there beer - why I also own Constellation Brands
Leader2light profile picture
They already near highs.
kenski profile picture
Closing price today of $71.89 is still 28% below their 52 week high and 19% below where it was on Feb 19 when the market started to drop.

Which is not much better than DIS (32% and 25%) for example. I believe people will go back to get coffee before they goto theme parks and movie theaters.

Anyone with a time horizon over a year... the first 20% in SBUX is easy money.
Why buy now tho? Their second quarter is going to be awful. You think after they report that they will be higher then the closing price of $71.89? Even forward-looking this should be down into the 50's until we see any sign of a "full" recovery.
% change from 52-week high isn't a great indicator of where a stock will trade long term. SBUX isn't an online co, it's a retail co levered to foot traffic.
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