In its first-quarter earnings report published on Tuesday, Starbucks beat analyst expectations for the last three months. So why is its stock suffering?
The last quarter was a strong one for Starbucks (NASDAQ: SBUX). Reporting on its first fiscal quarter of the year earlier this week, Starbucks posted revenue of $7.1 billion and earnings per share of 79 cents. This came largely in-line with analyst expectations for the quarter and represented healthy growth of 7% on the top-line.
Impressively, comparable sales — or year-over-year sales at stores open for more than a year — increased by 5%. This was driven by an increase in the average ticket at stores (or the amount the average customer spends) as well as a rise in the number of transactions recorded.
Speaking after the report, CEO Kevin Johnson said that it was “one of the strongest holiday seasons in the history of our company” and, based on that, the company was “off to a strong start in fiscal 2020.”
So why has the share price fallen more than 7% this week so far?
As anyone who has been tracking the company over the past few years will know, China is a massively important market for Starbucks’ future plans. Management has been investing heavily in the region, with a plan in operation since 2018 to open a store every 15 hours in order to hit a total of 6,000 stores opened by 2022.
This blistering growth has been hampered in recent weeks by the outbreak of the deadly coronavirus in Asia, however. In guiding for the rest of fiscal 2020, Johnson said:
“Currently, we have closed more than half of our stores in China and continue to monitor and modify the operating hours of all of our stores in the market in response to the outbreak of the coronavirus. This is expected to be temporary. Given the dynamic nature of these circumstances, the duration of business disruption, reduced customer traffic, and related financial impact cannot be reasonably estimated at this time but are expected to materially affect our International segment and consolidated results for the second quarter and full year of fiscal 2020.”
A tragic epidemic like the ongoing coronavirus is obviously impossible to predict. It will also be impossible to estimate the full effects of the outbreak or how long normal life will be affected in these regions.
This isn’t the first issue the company has run into in China. Previously, Starbucks faced some headwinds with its Chinese operations due to the ongoing trade war between Washington and Beijing. The company is also battling some intense local competition in the form of Luckin Coffee (NASDAQ: LK), which is reportedly opening a store every 3.5 hours.
It is important to note that an event like the coronavirus will affect all companies equally in the China region. John Culver, the company’s international president, has said that Starbucks is evaluating closures “each and every day” and that some stores that are open still offer delivery but may have a limited menu, based on supply chain constraints.
The short-term future is uncertain for Starbucks — as it is for all companies operating in the region. Long-term prospects based on the metrics in the last quarter, however, paint a promising picture for Starbucks.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Luckin Coffee and Starbucks. Read our full disclosure policy here.