Starbucks' China Recovery Playbook Offers Advantages
We see Starbucks as well positioned for market share gains ceded from smaller players.
As with other wide- and narrow-moat restaurant names, our focus coming out of wide-moat Starbucks' (SBUX) second-quarter update was less on the magnitude of COVID-19 disruptions and more on plans to position for the future. We continue to believe specialty coffee will be hard hit by COVID-19--our analysis suggests that 50%-55% of U.S. specialty coffee chains are operated by independents (three locations or fewer)--but we see Starbucks as well positioned for market share gains ceded from smaller players.
Starbucks will begin to reopen U.S. restaurants in early May and expects to have 90% of its company stores (9,000-plus) open by early June. Starbucks' U.S. comp declines continue to track in the 60%-70% range in April, but we believe its experience reopening its China stores will give it a competitive advantage as it "monitors and adapts" to changes in consumer behavior. A U.S. and China recovery will take time, as Starbucks forecasts China comps to decline 25%-35% in the third quarter and 10%-0% in the fourth quarter (versus a 50% decline in the second quarter). In our view, Starbucks' China sales trends offer a reasonable proxy for the U.S. the next several quarters. However, we continue to believe players with digital reach (U.S. rewards members increased 15% to 19.4 million), the ability to satisfy evolving consumer views regarding safety, multichannel distribution (constant-currency channel development segment sales were up 11%), and strong employee retention are best positioned for future market share gains. As such, we're comfortable with our five-year average annual revenue growth forecast of 8% (5%-6% unit, 4% comps), something we believe the market has not fully priced in.
There is no change to our $86 fair value estimate, and while operating volatility will continue, Starbucks' financial health, capital return story (buybacks have been suspended but it plans to maintain its dividend), and market share potential make the shares attractive at current levels.
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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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