Starbucks (NASDAQ:SBUX) survived the attack of Luckin Coffee (NASDAQ:LK) on its China business and is taking what it learned back to the U.S.
Luckin is in the process of being de-listed by NASDAQ after a scandal where it created false sales. But the company had some real sales and interesting ideas, using take-out and delivery to reduce its physical footprint.
That’s what Starbucks is adapting to. The company used its app, drive-throughs and delivery to cushion the first-quarter tumult, posting only a 5% drop in sales in the period. It’s now doubling down on the strategy, in the process closing 400 locations.
The new strategy makes Starbucks one of the few restaurant stocks worth looking at.
Third Place Becomes Fourth
The new Starbucks is a lot like an American version of Luckin.
Stores were already just 1,000 square feet in many locations. Now the company is adding walk-up windows to its drive-up windows, moving the action to its patios. The company is automating its relationship with Uber Eats and other delivery services. It’s pushing its app as a primary point of contact.
Instead of couches and WiFi, Starbucks is going with counters, delivery, and the smell of car exhaust. This won’t save the current quarter, where analysts expect a loss of 60 cents a share on revenue of $4.34 billion, down more than 40% from a previously typical quarter. But it could create a profitable “new normal.”
Before the pandemic, Starbucks had long-defined its stores as a “third place.” It wasn’t home or the office, but a personal “third” space for meetings and getting work done. Until there is a vaccine, this space will go away. Starbucks is trying to redefine itself as an extension of its app, a point of service.
Not Like 2008
The last time Starbucks faced a crisis like this was in 2008. It responded by closing all stores for an evening of training, then re-opening them. That’s what people remember. What they don’t remember is what happened next, cutting stores and jobs.
Morale and performance aren’t at issue this time, so Starbucks is going directly to cuts. Like the airlines, Starbucks is encouraging workers to take accrued time off and unpaid leave, even apply for unemployment. The rest are seeing hours cut. The company could go with permanent layoffs in September if the economy doesn’t re-open.
Over the near term, this allows employees to retain some benefits. But if full re-openings don’t happen this fall, the ax is going to fall.
What Analysts Say
So far Starbucks hasn’t cut its dividend, a 41-cent payoff yielding 2.2% at current levels.
This has maintained the loyalty of most analysts. TipRanks follows 24 Starbucks analysts and none has the “sell” light lit. Their median price target is $81.65, which would be 14% upside.
In addition to praising its fast reaction to the pandemic, analysts also like China, which is reopening. They see Starbucks as seizing Luckin’s niche and continuing to grow there.
The Bottom Line on Starbucks Stock
When I began writing this piece, I was seriously considering buying some Starbucks stock myself.
But I have decided to hold off. Whether Starbucks advertises on Facebook (NASDAQ:FB) has nothing to do with it.
The fastest way for Starbucks to grow during the pandemic would have been outside the store. But those sales are now going to Nestle (OTCMKTS:NSRGY), which signed a deal to take over Starbucks’ food service and packaged goods sales in 2018.
Starbucks transferred 500 employees to Nestle in the 2018 deal. It covers all the company’s brands, including Teavana tea and Seattle’s Best. Starbucks will get licensing revenue and branding, which is free money.
But until we see the light at the end of the pandemic tunnel, Starbucks will be fighting to stay in place. If I owned SBUX stock, I wouldn’t sell. But it’s more likely you’ll see it cheaper by fall.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB.