Skip to Content
Morningstar

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.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

More in Stocks

About the Author

RJ Hottovy

Sector Strategist
More from Author

R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

Sponsor Center