Key Takeaways

  • Adjusted EPS was -$0.46 vs. the -$0.49 analysts expected.
  • Same store sales plummeted 40%, roughly in line with expectations.
  • Revenue fell by less than what analysts expected.

What Happened

Starbucks reported its first quarterly loss in quite some time as quarantine hit its business severely. Earnings and sales fell by less than analysts expected, though still substantially. Same-store sales overall fell 40%, roughly in line with the 41% that analysts expected. One spot of brighter news, Starbucks narrowed the range of its full-year adjusted EPS guidance largely to the upside, from $0.55-$0.95 to $0.83-$0.98.

(Below is Investopedia's original earnings preview, published July 27, 2020)

What to Look For

Starbucks Corp.'s (SBUX) sales, earnings and stock price have fallen this year as the coronavirus pandemic has forced the global coffee house chain to close many of its stores and limit dine-in service at others. The company recently has been slowly reopening its stores in parts of the U.S., following strict government guidelines.

Investors will want to know whether Starbucks can reverse its plunging sales and other metrics when its reports earnings for Q3 FY 2020 on July 28 after the market close. Analysts currently estimate that Starbucks will report a sharp decline in revenue and a net loss. They expect the company to post adjusted earnings per share (EPS) of -$0.49. The company's fiscal year ends in September.

Investors also will likely look closely at a key metric to measure Starbucks’ growth: same-store sales. Analysts expect that news to be extremely negative. In Q3 FY 2020, analysts estimate same-store sales plunged by 41.1%, by far the worst year-over-year (YOY) decline in at least 18 quarters.

Starbucks shares initially took a steep dive on news of the pandemic. But despite rebounding by about 50% since their March lows, Starbucks shares still badly lag the broader market in 2020. Over the past 12 months, Starbucks posted a total return of -14.8% compared to 6.5% for the S&P 500.

One Year Total Return for S&P 500 and Starbucks
Source: TradingView.

Before its Q2 FY 2020 earnings results, Starbucks had posted positive YOY revenue and adjusted earnings growth in every quarter since Q1 FY 2018. During most of that time, YOY gains in adjusted EPS were strong. They rose by double-digit figures in nearly every quarter, including a 25.8% jump in adjusted EPS in Q3 FY 2019. That hot streak started to cool in Q1 FY 2020, when Starbucks reported a sharp downshift in EPS growth, rising only 5.1%. This was followed by a precipitous YOY earnings drop of 48.0% in Q2 FY 2020 ending in March, when the pandemic began to affect Starbucks.

Revenue, meanwhile, has generally risen at a stable pace in recent years, but with some significant swings from quarter to quarter. Since Q2 FY 2016, YOY revenue growth has ranged from a 16.2% in Q4 FY 2016 to a 4.9% decline in Q2 FY 2020. Until then, the only other quarter in which Starbucks reported falling revenue growth was Q4 FY 2017, when revenue fell a scant 0.2%, essentially flat.

For Q3 FY 2020, however, analysts expect the recent declines to intensify, with quarterly revenue of $3.2 billion compared to $5.5 billion in Q3 FY 2019, a YOY drop of -39.2%.

Starbucks Key Metrics
  Estimate for Q3 2020 (FY) Actual for Q3 2019 (FY) Actual for Q3 2018 (FY)
Adjusted Earnings Per Share ($) -0.49 0.78 0.62
Revenue ($B) 3.2 5.5 5.1
Same-store Sales (%) -41.1 6.0 1.0

Source: Visible Alpha

As mentioned, investors will be especially focused on Starbucks' same-store sales, also known as comparable-store sales. Same-store sales is a key metric for investors that provides a performance comparison of stores that have been in operation for at least one year. Examining same-store sales helps investors in determining what portion of a chain's sales come from existing stores and what portion comes from opening new stores. Investors and analysts also use the metric to determine management's success in producing revenue growth from existing assets.

Until 2020, Starbuck' same store sales showed steady growth by posting year-over-year growth for 16 straight quarters. The performance was especially striking during each quarter between Q4 FY 2018 and Q1 FY 2020, when the pace of sales growth in each quarter was faster than the same quarter a year earlier. For example, Starbucks' same store sales rose by 5% in Q4 FY 2019, much faster than Q4 FY 2018, when sales rose 3%.

That trend has reversed quickly, with same-store sales sliding 10% in Q2 FY 2020 as the pandemic began to gain steam. That Q2 decline was caused mainly by plunging business outside of the U.S. But analysts see a very different picture for Q3 FY 2020. They estimate the 41.1% fall in same store sales in Q3 came from a 42.9% plunge in sales in the company's Americas segment, which is mostly the U.S., and from a 39.9% fall in international same-stores sales. Since Starbucks had begun closing down many of its stores during the last 10 days of March, its financial results are likely to show the full effect of these closures in Q3.