<p>In some ways, Starbucks (NASDAQ: SBUX) did exactly what analysts expected for its fiscal second-quarter earnings report, without estimating profitability. At the same time, the global coffee phenomenon yielded a surprisingly positive result for revenue. But if you think this is a sign that the economy is improving for SBUX stocks, you should think again.
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Let’s dive into the key first. Ahead of the fiscal quarter, analysts set their target for consensus earnings per share at 34 cents. Instead, Starbucks delivered 32 cents. Given the concerns that the new coronavirus has caused, in my opinion it is not bad.
On the revenue front, Wall Street forecast $ 5.89 billion. Here, the company pulled a surprising pace and raised $ 6 billion. However, analysts were quick to note that this represented a decline of 5% compared to the previous year. In its conference call, management referred to store closures, mitigating efforts and reduced hours as a serious headwind.
Still, investors immediately buzzed on SBUX shares. First, management did not provide guidelines for the full year, which they drew in April. However, they acknowledged that the current quarter (ending June 30) will have a major negative impact. It did not like the street, which was hoping for a significant sign of improving consumer sentiment.
Interestingly, the latest news that Starbucks planned to resume 90% of US stores could not inspire SBUX shares.
It is not the case that the company lacks positive results. Again, revenue type is an indicator that the brand delivers tremendous loyalty, even in difficult times. Furthermore, the disaster that is Luckin Coffee (NASDAQ: LK), as our own Will Ashworth expert chronicler, is a positive for Starbucks.
However, China’s comparable store sales decreased by 50% YOY, which indicates a lot of work in the future.
Destroyed consumer economy will damage the SBUX share
Right now, the biggest concern I have for the SBUX share is the consumer economy. As you know, the Ministry of Labor released new information on unemployment, which was again gloomy. For the week ending April 25, 3.8 million workers filed for unemployment. Over a six-week period, 30 million Americans claimed unemployment benefits.
For all organizations, this is an astonishing number. But I think it’s especially bad for retail names like Starbucks because it a) invites competition and b) discretionary purchases are often the first (and easiest) personal budget items to cut.
In October 2019, I urged investors to be cautious about the SBUX share before the Q4 2019 result. I was mainly worried that competitors could avoid Starbucks during difficult times. I wrote:
In other words, the company is facing pricing for everything or nothing. If you want good things, you have to pay. Everything else tastes like shit.
During a bull market, it is perfectly fine. But if we end up in a recession that many are beginning to fear, I would worry about SBUX shares. Starbucks premium coffee is a frivolous luxury. And because their basics are miserable, every competitor suddenly becomes a viable competitor.
If it were not bad enough, refraining from too expensive coffee is among the simplest measures to harm workers. For example, if you typically spend $ 4 a day at Starbucks, you can easily raise a monthly bill of almost $ 90. At the second month, you look at almost $ 180.
Take a look at a Keurig K-Mini, which sells for $ 80. You buy it and pick up a pair of Starbucks (or other premium) branded K-bellows. The second month you are before the game while still enjoying premium and comfortable coffee.
More pain to come
Recently, I have heard the argument that the silver lining in the unemployed claims is that the degree of claim has decreased. It’s true. But like Ian Shepherdson, chief economist at Pantheon Macroeconomics, the pain is starting right now. The first claims came from workers with lower incomes. Now we are starting to see higher compensated workers waiting in line. Shepherdson wrote:
You can not close a bar twice … Terminators are now working through management and supply chains and business services.
This is actually a sobering thought. Therefore, it was not Starbucks’ management that did not move when they expected a bigger hit in the quarter. Frankly, management and business services are where Starbucks generates its consistent loyalty-driven revenue.
Without the “norms”, which my friend likes to call warriors, the barista faces a very uncertain future. And that’s why I’re not in the mood to rush into the SBUX stock right now.
Josh Enomoto, a former senior business analyst at Sony Electronics, has helped broker larger contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including law, construction management and healthcare. At the time of writing, he had no position in any of the above-mentioned securities.