Starbucks Corp.’s fiscal first quarter was going well, and then the coronavirus hit.
The global coffee giant reported earnings that beat expectations and global same-store sales growth of 5%. The company planned to raise its guidance, but the outbreak in China stopped them.
“Given the strength of our Q1 results, we had intended to raise certain aspects of our full year financial outlook for fiscal 2020,” said Chief Executive Kevin Johnson on the late Tuesday earnings call, according to a FactSet transcript. “However, due to the dynamic situation unfolding with the coronavirus, we are not revising guidance at this time and as we get more clarity on the situation, we will transparently communicate with investors.”
Starbucks SBUX, -0.30% said it has closed more than half of its stores in China, and changed all of its operating hours in the region in response. Starbucks has about 4,300 stores in China.
Starbucks had a 3% same-store sales increase in China during the fiscal first quarter, and a 1% increase in transactions.
Starbucks’ previously announced fiscal 2020 guidance, including global same-store sales growth of 3% to 4%, revenue growth of 6% to 8%, earnings in the range of $2.84 to $2.89 and adjusted EPS of $3.00 to $3.05.
The FactSet consensus is for same-store sales growth of 3.4%, revenue of $28.13 billion, implying a 6.1% increase, and EPS of $3.01.
Starbucks stock was down 2.8% in Wednesday trading.
Despite this tremendous challenge, Starbucks executives and analysts are positive about the company and the future.
“[W]e see strong fiscal first quarter results (prior to the coronavirus outbreak) as indicative of the strength of the underlying fundamentals, and view near-term stock weakness as an opportunity as we expect continued Americas strength and ultimately a recovery in earnings growth given the nature of the disruption (that is, not a company/brand-specific issue),” RBC Capital Markets analyst Christopher Carril wrote.
RBC rates Starbucks shares outperform with a $97 price target.
JPMorgan analysts agree that the coronavirus-related challenges in China are mitigated by the fact that they aren’t company-specific.
“This is not a Starbucks brand issue in any way, like we have seen in various cases in major markets where recovery cost/length is uncertain as consumer sentiment is negative on a brand-specific basis,” analysts said.
“Instead, we are taking a ‘wait-and-see’ approach and not viewing coronavirus as any type of impairment to Starbucks’ longer-term growth outlook, although fiscal 2020 comp and even store growth are at risk.”
JPMorgan rates Starbucks stock overweight with a $94 price target.
UBS analysts called the same-store sales result in China “light,” but remains bullish about the region.
“We expect Starbucks China fundamentals remain solid given digital, loyalty and product innovation, and solid go forward store development levels will be maintained,” analysts said.
UBS rates Starbucks shares neutral with a $95 price target.
BTIG analysts are more concerned than others about the impact that the operational interruption in China will have.
“The magnitude of the financial impact is very difficult to gauge at this point, the duration of the closures remains unknown and we believe Starbucks continues to pay its employees despite the store closures,” analysts led by Peter Saleh wrote.
“While impressed by the turnaround in results over the past several quarters, we remain neutral given the year-to-date performance, heightened valuation and unfolding China uncertainty at this time.”
Starbucks shares have rallied 25% over the past year while the benchmark S&P 500 index SPX, -0.68% is up 20.7% for the period.