Starbucks earnings preview: COVID-19 has changed consumer habits but Starbucks is adapting

Starbucks Corp.’s

ability to adapt has been a key driver for its improved performance despite the dramatic COVID-19-related changes in consumer breakfast habits, according to Quo Vadis.

Starbucks is scheduled to report its fiscal fourth-quarter
earnings on Thursday after the closing bell.

“[W]e see the investment case turning on Starbucks’ ability
to adapt its assets and press its advantage to grow in a world with lasting
secular change (including work-from-home) in the consumer segment,” wrote John
Zolidis, president of Quo Vadis.

“More specifically, we cite the company’s portfolio
adaptation with increased penetration of drive-thrus and its express Starbucks
Now format, the company’s leadership in digital engagement and loyalty around
Starbucks Rewards and Mobile Order and Pay, and convenience initiatives
including curbside pickup and delivery partnerships.”

Zolidis also highlights the coffee company’s financial
position and menu innovation, which Quo Vadis thinks investors should consider.

Read: Starbucks’ Pumpkin Spice Latte still drives traffic and could be a source of holiday season inspiration for retailers

RBC Capital Markets’ Christopher Carril looks ahead to
fiscal 2021, which will also hinge on the company’s ability to change.

“In our view, Starbucks remains an attractive recovery play within restaurants, due in large part to its ability to accelerate the transformation of its physical store base (e.g. develop more drive-thru and ‘Pickup’ stores), while also leveraging its already best-in-class digital platform and loyalty program,” RBC said.

Analysts there said they’ll be keeping an eye on margins, with management already forecasting that “it believes that a margin recovery will lag the sales recovery by about two quarters.”

RBC rates Starbucks stock outperform and raised its price
target to $97 from $89.

Starbucks has an average overweight stock rating and average
price target of $90.46, according to 33 analysts polled by FactSet.

Here’s what else to watch for when Starbucks reports:

Earnings: FactSet forecasts earnings per share of 31 cents, down from 70 cents last year.

Estimize, which crowdsources estimates from sell-side and
buy-side analysts, hedge-fund managers, executives, academics and others, is
guiding for EPS of 34 cents.

Starbucks has beat FactSet EPS expectations eight out of the last nine quarters.

Also: Kroger to launch two ghost kitchens as food chains get creative during coronavirus

Revenue: FactSet is guiding for revenue of $6.06 billion, down from $6.75 billion last year.

Estimize forecasts revenue of $6.11 billion.

Starbucks has beat the FactSet revenue forecast the last
four out of five quarters.

Stock price: Starbucks shares have rallied 18% for the past three months, and are up 1.7% for the year to date. The S&P 500 index

has gained 4.8% for 2020 so far.

Other items:

-“China should be reaching full sales recovery,” UBS said. Analysts credit the company’s digital efforts, Starbucks Now, and a partnership with Alibaba Group Holding Ltd.

Eighty percent of stores are operating at full capacity, UBS said.

UBS rates Starbucks stock neutral with an $89 12-month price
target, up from $81.

Starbucks’ price target was also lifted at Wedbush (to $88
from $81, stock rated neutral) and at MKM Partners (to $99 from $79, stock
rated neutral).

“Starbucks has made significant strides across its China
marketplace’s sales and continues to make progress across its domestic
operations,” wrote MKM.

-Chief rival Dunkin’ Brands Inc. could go private. It was revealed on Sunday that Dunkin’

is in talks with Roark Capital-backed Inspire Brands on a deal that could value Dunkin’ at $8.8 billion.

See: For Dunkin’, a takeover could be a chance to head out west

-If California conditions improve, it could have a “significant” impact on Starbucks, according to data from retail intelligence company Visits to Starbucks in August were down 21.5% year-over-year even with ongoing challenges in California, including the pandemic and wildfires. In September, visits were down 34.8%.

“Should issues there with COVID and wildfires continue to
come under control, the impact for Starbucks could be very significant,” said in a report.

For the first half of October, visits were down an average
19.8%, with the week of Oct. 12 down 17.8%.

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