Starbucks Corporation (NASDAQ: SBUX) provided its investors with an update on its business Thursday in the wake of the global coronavirus outbreak, and the picture wasn’t pretty.
Starbucks said it is expecting a 50% drop in China revenue in the first quarter due to the outbreak. Temporary store closures in China sent same-store sales down 78% in China in the month of February. Prior to the outbreak, Starbucks was anticipating 3% same-store sales growth in China for the first quarter.
Now, the company is guiding for a revenue hit of between $400 million and $430 million due to the virus outbreak.
The good news for investors is that more than 90% of Starbucks stores in China have now reopened after Starbucks closed about 80% of its locations in the country last month.
While some stores are delivery only at this point, Starbucks said it expects 95% of China stores to reopen by the end of the second quarter.
Starbucks shares are down 14.4% in the past month thanks to the coronavirus. Several analysts weighed in on the stock following yesterday’s update. Here’s a sampling of what they had to say.
Starbucks' China Business Hammered
Stifel analyst Chris O'Cull said the earnings impact from the virus was larger than he anticipated, but the impact seems limited to China for now.
“Importantly, Starbucks noted there has been no perceptible impact from COVID-19 on the US business, which accounts for about 65% of total revenues; our recently updated estimates did not include any impact from COVID-19 outside of the International segment.”
MKM Partners analyst Brett Levy said the China update was worse than anticipated, but the U.S. update was encouraging.
“Starbucks' management provided the Street with some welcome color and clarity on how its two largest markets are performing (with the U.S. trends unchanged and quantification on the China and international challenges), providing the Street with a little good, a little bad,” the analyst said.
Baird analyst David Tarantino said the impact on Starbucks’ China business was eye-opening, but positive trends in the U.S. are reassuring for long-term investors.
"We are optimistic that COVID-19 impacts will prove transitory, but we are taking a more conservative approach with our valuation assumptions amid rising risks of a broader economic slowdown from this issue."
International Uncertainty Ahead For Starbucks
Wedbush analyst Nick Setyan said Starbucks has now clearly defined the China impact, but the rest of the company’s global business remains at risk.
“We believe Starbucks' valuation properly reflects near-term uncertainty regarding the potential impact on global sales and profitability from COVID-19, offset by comp and margin outperformance in the medium- to long-term,” the analyst said.
Credit Suisse analyst Lauren Silberman said the impact on Starbucks’ international business in countries like Japan, South Korea and Italy remains uncertain.
“We expect Japan to have the most meaningful impact as a company-operated market representing ~40% of the International segment’s SSS base and likely 6-8% of SBUX’s operating profit."
Morgan Stanley analyst John Glass said the COVID-19 update was encouraging given that the negative impact on China wasn’t materially worse than he had anticipated.
“While we believe the situation remains highly fluid and we'd anticipate at some point an impact on the US market, this news would suggest that risk in China for SBUX has been mostly ring-fenced,” the analyst said.
Starbucks Ratings, Price Targets
- Stifel has a Hold rating and $90 target.
- Wedbush has a Neutral rating with a price target lowered from $95 to $84.
- Morgan Stanley has an Equal-Weight rating with a price target lowered from $95 to $93.
- MKM Partners has a Buy rating with a price target lowered from $105 to $92.
- Baird has a Neutral rating with a price target lowered from $94 to$82.
- Credit Suisse has an Outperform rating with a price target lowered from $105 to $95.
Starbucks Price Action
The stock was down 3.16% at $73.78 at the time of publication Friday.