Starbucks Analysts Stick To Sidelines After Q3 Print, Break Down COVID-19 Impact On Coffee Chain

Starbucks Corporation's SBUX third-quarter report quantified the impact of the COVID-19 pandemic on the coffee chain.

Starbucks said Tuesday that its fiscal third quarter revenue was down 38% year-over-year to $4.2 billion, and the company posted a net loss of $678.4 million. The Street's reaction to the print was mostly consistent, with multiple analysts recommending that investors stick to the sidelines.

The Starbucks Analysts

BofA Securities analyst Gregory Francfort maintains a Neutral rating on Starbucks with a price target lifted from $80 to $82.

KeyBanc Capital Markets analyst Eric Gonzalez maintains a Sector Weight rating. 

Stifel analyst Chris O'Cull maintains a Hold rating on Starbucks with a price target lifted from $75 to $78.

Morgan Stanley analyst John Glass maintains an Equal-weight rating with a price target lifted from $76 to $79.

Wedbush analyst Nick Setyan maintains a Neutral rating with a price target lifted from $75 to $81.

BofA Recaps Starbucks Q3 

Starbucks reported EPS of negative 46 cents per share in its June-ending quarter, and this was better than management's mid-June guidance of down 55 cents to down 70 cents, Francfort wrote in a note.

The revenue flow-through to profits improved from the prior quarter to 65%, but the figure is worse than Starbucks' usual 50% range, the analyst said. 

Starbucks said that comps were positive 2% at the 3,100 U.S. stores that were open for the duration of the quarter, although comps were likely weighted to the drive-thru, he said.

Digital usage grew in the quarter, as mobile ordering accounted for 22% of the mix, up from 18% in the prior quarter, according to BofA. 

KeyBanc Sees Improving US Trends At Starbucks 

Starbucks' report signaled an improving environment in the U.S. and Americas, Gonzalez said in a note.

Americas same-store sales improved from down 43% in May to down 19% in June. The improving trend is expected to continue into the fiscal fourth quarter to down 12% to down 17%, the analyst said. 

The company is seeing encouraging trends in its Rewards (MSR) program, as total app downloads increased 9% to 3 million, and MSR members accounted for 46% of sales, he said — up four points from last year.

"We believe Starbucks's scale, digital platform, innovation
competencies, and forward-thinking business mentality should position it well over the LT."

Related Link: Why Wells Fargo Is Bullish On Starbucks Despite COVID-19 Headwinds

Stifel Says Starbucks' China's Momentum Is On Pause 

Starbucks' same-restaurant sales in China improved throughout the quarter from down 21% in May to down 16% in June, O'Cull said in a note.

Yet a resurgence of COVID-19 cases in Beijing resulted in a softening of traffic trends in the last two weeks of the quarter, the analyst said. 

Starbucks' full-year same-restaurant sales guidance range was lowered from a range of down 10% to down 20% to a range of down 15% to down 20%, the analyst said.

The figures do not include a VAT exemption, so a comparable range is down 17% to down 22%, he said. 

The company expects same-restaurant sales to substantially recover by the end of the fiscal first quarter, O'Cull said. 

The momentum is likely to come from improvements in the rewards program and a mobile order and pay feature across multiple platforms through a Starbucks-Alibaba partnership that will reach nearly 1 billion users, the analyst said. 

Morgan Stanley On Starbucks' COVID-19 Exposure

Starbucks is among the most COVID-19-impacted challenged businesses, especially within limited service restaurants, Glass said in a note.

Most notably, the morning routine for the majority of people has changed, and this unfavorable shift will likely remain in place for the foreseeable future, the analyst said. 

Flat comps in the U.S. aren't expected until March 2021, when the industry starts to lap the early days of the pandemic, according to Morgan Stanley. 

Wedbush On A Longer-Term Starbucks Tailwind

Starbucks deserves credit for a strategy of further rationalizing its domestic stores, especially in dense urban markets, Setyan said in a note. 

The company will reposition many stores to pivot toward a pick-up only format, the analyst said.

This represents a medium- to longer-term tailwind for the company, as it will bring "added layers of comp" over time, he said. 

SBUX Price Action

Starbucks shares were trading 4.01% higher to $77.63 at last check Wednesday. 

Related Link: Dunkin Vs. Starbucks: Analyst Picks A Winner In A Socially Distanced World

Photo courtesy of Starbucks.