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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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About the Author

RJ Hottovy

Sector Strategist
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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.

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