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Category: Starbucks (SBUX)
Date: 28 June 2020 Starbucks (SBUX) stock price: $71.57 We take a look at the press release of Starbucks in which they provide investors with an update of their operations, we will focus on the part of the update that covers China, following lifting of lockdown restrictions in one of the group's biggest markets and the country that is the source of the Covid-19 pandemic.
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The recovery in China, which started in late February, has continued into our third fiscal quarter, with comparable store sales versus the prior year declining 21% in May, an improvement from a decline of 32% in April "
About Starbucks (SBUX)
Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 81 markets. Formed in 1985, Starbucks Corporation’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “SBUX.” We purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea and other beverages and a variety of high-quality food items through company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, as well as grocery and foodservice through our Global Coffee Alliance with Nestlé S. A. ("Nestlé"). In addition to our flagship Starbucks Coffee brand, we sell goods and services under the following brands: Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve and Princi.
Press release from Starbucks (SBUX) providing an update on their operations. We focus on China
Since the beginning of the COVID-19 pandemic, three principles have shaped our ongoing efforts to navigate the crisis and the significant impacts the pandemic is having on communities, front-line responders, governments and businesses around the world. We have been mindful in addressing the needs of all Starbucks stakeholders – including by making meaningful investments to support our partners (employees) since the early days of the crisis – and we are pleased to share that our business is steadily recovering.
Our consistent approach of
a) prioritizing the health and safety of our partners and customers,
b) supporting local health and government officials as they work to mitigate the spread of the virus and
c) showing up in a positive and responsible way for the communities we serve, has enabled us to move beyond the “mitigate and contain” phase of dealing with the pandemic into the “monitor and adapt” phase, as we’ve re-opened the vast majority of our stores around the world and modified our operations to meet new public health guidelines and evolving customer behaviors and expectations. With each passing week, we are seeing clear evidence of business recovery, with sequential improvements in comparable store sales performance. The Starbucks brand is resilient, customer affinity is strong and we believe the most difficult period is now behind us.
As our business recovery continues, we are now laying the foundation for a more transformational phase—“restore and build resilience”—enabling us to accelerate the transformation of our business in ways that elevate the customer and partner experience and drive long-term growth. We shared some insight into this in our “Bridge to the Future” letter addressed to Starbucks partners on May 21, outlining how we are intensifying efforts to address consumers’ increasing demand for convenience, including mobile ordering for pick-up, drive-thru and curbside delivery. Prior to the COVID-19 outbreak, approximately 80% of Starbucks transactions in U.S. company-operated stores were “on-the-go” occasions. This dynamic led our leadership team to reexamine our U.S. store footprint to determine how we might evolve our retail presence over time through targeted store renovations, relocations and new stores, a process that has been underway for two years.
We have since introduced a new store format, Starbucks® Pickup, to enhance the “onthe-go” customer experience and improve operating efficiency across Starbucks® stores in certain major metropolitan areas in the Americas—and last year, we developed plans to increasingly deploy this new format in densely populated, urban markets. Starbucks Pickup is tailored to customers who prefer to order ahead and pay through the Starbucks® mobile app for pick-up, or those who want their Starbucks delivered to them by placing an order through Uber Eats. We believe this transformation of our store portfolio, blending Starbucks Pickup stores with traditional Starbucks stores in dense metropolitan markets, will elevate the customer experience and position Starbucks for long-term growth. Our vision is that each large city in the U.S. will ultimately have a mix of traditional Starbucks cafés and Starbucks Pickup locations. With Starbucks Pickup stores located within walking distance of a traditional Starbucks café, customers can choose to enjoy their Starbucks Experience in a Starbucks café or pick up their order at either that café or a nearby Starbucks Pickup store. Starbucks Pickup stores will provide more points of presence to better serve “on-the-go” customers while reducing crowding in our cafés, thereby improving the “sit-and-stay” experience for “third place” occasions. No matter the format, we know that the Starbucks “third place” experience occurs from the moment a customer envisions their daily Starbucks Experience to wherever they enjoy that Starbucks beverage. This strategy aligns closely with rapidly evolving customer preferences that have accelerated as a result of COVID-19, including higher levels of mobile ordering, more contactless pick-up experiences and reduced in-store congestion, all of which naturally allow for greater physical distancing.
Our consistent approach of
a) prioritizing the health and safety of our partners and customers,
b) supporting local health and government officials as they work to mitigate the spread of the virus and
c) showing up in a positive and responsible way for the communities we serve, has enabled us to move beyond the “mitigate and contain” phase of dealing with the pandemic into the “monitor and adapt” phase, as we’ve re-opened the vast majority of our stores around the world and modified our operations to meet new public health guidelines and evolving customer behaviors and expectations. With each passing week, we are seeing clear evidence of business recovery, with sequential improvements in comparable store sales performance. The Starbucks brand is resilient, customer affinity is strong and we believe the most difficult period is now behind us.
As our business recovery continues, we are now laying the foundation for a more transformational phase—“restore and build resilience”—enabling us to accelerate the transformation of our business in ways that elevate the customer and partner experience and drive long-term growth. We shared some insight into this in our “Bridge to the Future” letter addressed to Starbucks partners on May 21, outlining how we are intensifying efforts to address consumers’ increasing demand for convenience, including mobile ordering for pick-up, drive-thru and curbside delivery. Prior to the COVID-19 outbreak, approximately 80% of Starbucks transactions in U.S. company-operated stores were “on-the-go” occasions. This dynamic led our leadership team to reexamine our U.S. store footprint to determine how we might evolve our retail presence over time through targeted store renovations, relocations and new stores, a process that has been underway for two years.
We have since introduced a new store format, Starbucks® Pickup, to enhance the “onthe-go” customer experience and improve operating efficiency across Starbucks® stores in certain major metropolitan areas in the Americas—and last year, we developed plans to increasingly deploy this new format in densely populated, urban markets. Starbucks Pickup is tailored to customers who prefer to order ahead and pay through the Starbucks® mobile app for pick-up, or those who want their Starbucks delivered to them by placing an order through Uber Eats. We believe this transformation of our store portfolio, blending Starbucks Pickup stores with traditional Starbucks stores in dense metropolitan markets, will elevate the customer experience and position Starbucks for long-term growth. Our vision is that each large city in the U.S. will ultimately have a mix of traditional Starbucks cafés and Starbucks Pickup locations. With Starbucks Pickup stores located within walking distance of a traditional Starbucks café, customers can choose to enjoy their Starbucks Experience in a Starbucks café or pick up their order at either that café or a nearby Starbucks Pickup store. Starbucks Pickup stores will provide more points of presence to better serve “on-the-go” customers while reducing crowding in our cafés, thereby improving the “sit-and-stay” experience for “third place” occasions. No matter the format, we know that the Starbucks “third place” experience occurs from the moment a customer envisions their daily Starbucks Experience to wherever they enjoy that Starbucks beverage. This strategy aligns closely with rapidly evolving customer preferences that have accelerated as a result of COVID-19, including higher levels of mobile ordering, more contactless pick-up experiences and reduced in-store congestion, all of which naturally allow for greater physical distancing.
We opened and have been operating two Starbucks Pickup stores in the last seven months, one at Penn Plaza in Manhattan and another in Toronto’s Commerce Court. These test stores have provided us with insights into how we can optimally integrate this new format with nearby café locations. We will be opening another Starbucks Pickup location near Grand Central Station in Manhattan in the near future. While we had originally planned to execute this strategy over a three- to five-year timeframe, rapidly evolving customer preferences hasten the need for this concept and we are now envisioning the accelerated development of Starbucks Pickup stores in major U.S. cities over the next 18 months, including retrofitting and repositioning many existing cafés to expand our store portfolio with a mix of appropriate store formats. This acceleration of our strategy requires that we Page 1 assess our existing store portfolio with respect to renovations, relocations and closures. To inform these decisions, we are evaluating trade-area shifts, lease expirations and changes in customer traffic patterns while also considering opportunities to enhance the customer experience and capitalize on future growth potential. As noted above, the investments we’ve made in supporting our partners through the months of widespread store closures have been instrumental to our overall recovery efforts and are in line with Starbucks mission and values. With about 43 million Americans currently out of work, we are fortunate to have the ability to demonstrate our respect and care for our partners who proudly wear the green apron through COVID-19-era benefits that included service pay, catastrophe pay, benefits continuation and expanded mental health support, childcare and food and beverage allowances.
With the re-opening of our U.S. company-operated stores, we’re evolving these programs to continue to support our partners while balancing the needs of our business, notably a need to align labor schedules and hours with customer demand as traffic fully recovers over time. We will continue to engage transparently with our partners and listen to their preferences. Over the past two weeks, our U.S. field leaders have had direct conversations with individual store partners, providing personalized information, internal and external resources, and a range of options to help partners consider what is best for them as we move forward. Each partner’s situation is personal, and each store’s business needs are unique. Our intent is to help our partners along this journey, including supporting those who take an unpaid leave of absence or pursue a path outside of Starbucks. Guided by our values, we will work to maximize the opportunities for partners as we enter this new phase as a company. We have a clear vision for our “Bridge to the Future,” and we are accelerating our plans to transform our store portfolio, elevate the customer experience for this new era, and drive long-term growth. As we navigate the global pandemic, we strive for transparency with all stakeholders, and today we share more specifics on the business recovery, new store growth and the overall strength of our financial position.
China Comparable Store Sales Update
The recovery in China, which started in late February, has continued into our third fiscal quarter, with comparable store sales versus the prior year declining 21% in May, an improvement from a decline of 32% in April, as shown in Chart 1 below. Comparable store sales declined by approximately 14% in the final week of May compared to prior year, demonstrating continued upward momentum. Currently, 99% of stores in China are open, of which approximately 90% have returned to pre-pandemic operating hours. Over 70% of the stores that are open in China have full café seating available, in full compliance with local regulatory guidance, while the rest are offering physically-distanced dining capacity. With most cafés welcoming customers for in-store transactions by the end of April, café sales increased in May, and sales mix from mobile orders trended down correspondingly, from a high of about 80% in the final week of February, to approximately 22% in the last week of May. However, this still exceeded pre-COVID-19 levels, and was a significant increase from 15% recorded in Q1, demonstrating customer adoption of new ordering habits and occasions. Commercial trade zones have seen the fastest pace of recovery, while transportation and tourist trade zones are recovering more slowly. In light of these overall trade-zone dynamics, lower-tier cities have generally shown stronger recovery compared to higher-tier cities. The fewer than 1% of Starbucks stores that remain closed in China are located where mandated restrictions are still in effect, primarily transportation, cinema and tourist areas.
China Store Development Update
While we temporarily paused new store openings in China in the second quarter of fiscal 2020, given the impacts of COVID-19, store development activities resumed at the end of March. Across April and May, 57 net new stores were opened, including eight Starbucks Now™ stores, which provide customers the convenience of mobile ordering for pickup and delivery. As of the end of May, there were 10 of these innovative store locations in China, across all four of the market’s Tier 1 cities, and we have plans to expand into several Tier 2 cities in the coming months. The number of Starbucks locations in China has surpassed 4,400, with the addition of 281 net new stores through the end of May in fiscal 2020. We are on track to add at least 500 net new stores this fiscal year, despite the temporary setback from COVID-19.
With the re-opening of our U.S. company-operated stores, we’re evolving these programs to continue to support our partners while balancing the needs of our business, notably a need to align labor schedules and hours with customer demand as traffic fully recovers over time. We will continue to engage transparently with our partners and listen to their preferences. Over the past two weeks, our U.S. field leaders have had direct conversations with individual store partners, providing personalized information, internal and external resources, and a range of options to help partners consider what is best for them as we move forward. Each partner’s situation is personal, and each store’s business needs are unique. Our intent is to help our partners along this journey, including supporting those who take an unpaid leave of absence or pursue a path outside of Starbucks. Guided by our values, we will work to maximize the opportunities for partners as we enter this new phase as a company. We have a clear vision for our “Bridge to the Future,” and we are accelerating our plans to transform our store portfolio, elevate the customer experience for this new era, and drive long-term growth. As we navigate the global pandemic, we strive for transparency with all stakeholders, and today we share more specifics on the business recovery, new store growth and the overall strength of our financial position.
China Comparable Store Sales Update
The recovery in China, which started in late February, has continued into our third fiscal quarter, with comparable store sales versus the prior year declining 21% in May, an improvement from a decline of 32% in April, as shown in Chart 1 below. Comparable store sales declined by approximately 14% in the final week of May compared to prior year, demonstrating continued upward momentum. Currently, 99% of stores in China are open, of which approximately 90% have returned to pre-pandemic operating hours. Over 70% of the stores that are open in China have full café seating available, in full compliance with local regulatory guidance, while the rest are offering physically-distanced dining capacity. With most cafés welcoming customers for in-store transactions by the end of April, café sales increased in May, and sales mix from mobile orders trended down correspondingly, from a high of about 80% in the final week of February, to approximately 22% in the last week of May. However, this still exceeded pre-COVID-19 levels, and was a significant increase from 15% recorded in Q1, demonstrating customer adoption of new ordering habits and occasions. Commercial trade zones have seen the fastest pace of recovery, while transportation and tourist trade zones are recovering more slowly. In light of these overall trade-zone dynamics, lower-tier cities have generally shown stronger recovery compared to higher-tier cities. The fewer than 1% of Starbucks stores that remain closed in China are located where mandated restrictions are still in effect, primarily transportation, cinema and tourist areas.
China Store Development Update
While we temporarily paused new store openings in China in the second quarter of fiscal 2020, given the impacts of COVID-19, store development activities resumed at the end of March. Across April and May, 57 net new stores were opened, including eight Starbucks Now™ stores, which provide customers the convenience of mobile ordering for pickup and delivery. As of the end of May, there were 10 of these innovative store locations in China, across all four of the market’s Tier 1 cities, and we have plans to expand into several Tier 2 cities in the coming months. The number of Starbucks locations in China has surpassed 4,400, with the addition of 281 net new stores through the end of May in fiscal 2020. We are on track to add at least 500 net new stores this fiscal year, despite the temporary setback from COVID-19.
Our last stock valuation of Starbucks (29 April 2020)
So based on Starbucks (SBUX) latest earnings report and their fiscal guidance what do we value the stock of Starbucks at? Based on their earnings report and their withdrawal of their fiscal guidance and predicted impact of Coronavirus on their earnings our valuation model provides a target price (full value price) for Starbucks (SBUX) at $61.90 a stock (down slightly from our 1st quarter 2020 earnings report valuation of Starbucks). We therefore believe the stock of Starbucks is overvalued
We recommend that long term fundamental and value investors look to enter a stock at least 10% below our target (full value) price which in this case is $61.90. A good entry point into Starbucks would therefore be at $55.70 or below.
We expect the stock of Starbucks to pull back from current levels to levels closer to our target price (full value price) in coming weeks and months.
We recommend that long term fundamental and value investors look to enter a stock at least 10% below our target (full value) price which in this case is $61.90. A good entry point into Starbucks would therefore be at $55.70 or below.
We expect the stock of Starbucks to pull back from current levels to levels closer to our target price (full value price) in coming weeks and months.
Next earnings release of Starbucks (SBUX)
Starbucks will release their 3rd quarter 2020 earnings on 28 June 2020