Starbucks' Foundation for Future Growth Remains Intact

Much of the focus from Starbucks' SBUX preliminary second-quarter results appears to be the severity of U.S. comp declines (60%-70% the final week of March), but we see several reasons Starbucks is well positioned for market share gains over a longer horizon, helping to reinforce our wide-moat rating.

Starbucks' U.S. comp growth (up 8%, with transactions and average ticket each up 4%) before shelter-in-place mandates took effect is significant, as it represents an acceleration from the first quarter and was likely the result of several product, digital engagement, and delivery/drive-thru initiatives gaining traction. We believe specialty coffee will be one of the restaurant categories hardest hit by coronavirus disruptions--our analysis suggests that 50%-55% of specialty coffee chains are operated by independents (three locations or less)--and we believe Starbucks early 2020 trends indicate consumers will return as shelter-in-place restrictions ease. While Starbucks China's recovery will take time--comps improved from a 90% decline in mid-February to a 42% drop the last week in March--we believe its digital engagement efforts in the region (coupled with Luckin Coffee's sudden financial troubles) will also result in share gains. Finally, because Starbucks paid most of its employees in the U.S. and China as usual during store operating restrictions while also offering additional benefits/insurance, we expect it will face less future staffing issues than other restaurant operators.

Starbucks' preliminary second-quarter results (including adjusted EPS of $0.32) are roughly in line with our model, and we're not planning to change our $86 fair value estimate. While operating volatility will continue, Starbucks' financial health (including $3.5 billion in additional short-term borrowing facilities), capital return story (buybacks have been suspended but the company plans to maintain its dividend), and potential for market share gains make it attractive at current levels.

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