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Stock Analyst Update

Starbucks' Earnings Highlights Dimmed Over Coronavirus

The wide-moat firm closed hundreds of stores in China, and we encourage investors to keep this name on their radars for coronavirus-related pullbacks.

Ongoing benefits from its customer experience, beverage innovation, and digital initiatives--which helped drive global comps of 5% and 80 basis points of adjusted operating margin growth to 18.2%--should have been the highlight of Starbucks' (SBUX) first-quarter update. However, these took a backseat to management's assessment of the China coronavirus outbreak, which took on added importance since Starbucks was the first publicly traded restaurant to comment on the situation.

Noting "dynamic circumstances," Starbucks did not offer an estimate of the coronavirus impact but noted that "more than half" of its stores in China are closed (implying almost 2,200 stores) and that the situation would "materially affect" results for the second quarter and full year. Management noted that it would have raised its full-year operating margin and EPS outlook--previously calling for modest operating margin expansion and $3.00-$3.05 in adjusted EPS--based on the strong first-quarter results but left its guidance unchanged until it can more reasonably estimate the impact. Assuming the affected stores stay closed for the next 1-2 weeks (in addition to the week they've already been closed), we believe the China comps will likely experience a second-quarter low-double-digit decline and potentially a mid-single-digit decline in the third quarter. This would translate to a mid-single-digit decline in international segment comps for the second quarter and low-single-digit decline for fiscal 2020 while dragging full-year consolidated EPS down by $0.20-$0.30.

While we plan to reduce our 2020 outlook, the brand intangible asset and cost advantage sources underpinning our wide moat rating remain intact. We're maintaining our $92 fair value estimate, as we expect near-term pressure to be offset by outsize revenue and operating profit growth in fiscal 2021. Shares strike us as fairly valued, but we would encourage investors to keep this name on their radars for coronavirus-related pullbacks.

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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.