Store Optimization Could Be Key for Starbucks Recovery
Despite stores closures, we remain comfortable with our fair value estimate and five-year outlook for the wide-moat company.
Much of the focus coming out of wide-moat Starbucks' (SBUX) June 10 update has been on the pace of the company's coronavirus recovery in key markets and the associated incremental costs. It's clear that Starbucks' recovery will have a different trajectory than the industry, given its dependency on the morning daypart (affected by work-from-home employees and reduction in morning commuters) and its experience-focused formats (disproportionately affected by mandated restaurant closures and changes in consumer behavior). However, we believe the key takeaway for investors is Starbucks' emphasis on convenience-focused locations (including Starbucks Pickup and drive-thru locations) and other store optimization efforts, which we think will drive market share as the specialty coffee category consolidates in the years to come.
Management's updated Americas segment outlook (40%-45% and 10%-20% comparable sales declines in the third and fourth quarters) is aligned with our model, although its international segment (also 40%-45% and 10%-20% comp declines in the third and fourth quarters) was moderately worse than anticipated due to extended store closures in Japan. We continue to forecast negative comps in early fiscal 2021. From a cost perspective, store closures and employee investments are expected to weigh on third-quarter profitability more than we had expected (guidance calls for an adjusted EPS loss of $0.55-$0.79), though the fourth-quarter outlook (adjusted EPS of $0.15-$0.40) is aligned with our outlook. Management's updated full-year adjusted EPS outlook of $0.55-$0.95 appears reasonable.
We're planning to maintain our $86 fair value estimate as near-term sales and margin pressures should be offset by incremental market share gained from competitors exiting the market. We view the shares as undervalued and remain comfortable with our five-year outlook for 8% (5%-6% unit, 4% comps) average annual revenue growth and restaurant margins around 18%.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.