Will Starbucks Remain Steady In The Covid Recession?

by Trefis Team
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Yes, Starbucks’ stock (NASDAQ:SBUX) can survive a Covid recession despite declining around 17% since the beginning of the year. The restaurant industry is rattled, with restaurants like Luby’s put up for sale. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders, will result in minimal visits for restaurants. The decision to close 400 stores in North America over the next 18 months and accelerating the plans to open 300 new locations focused on takeaway and delivery should help stem the fall in Starbucks revenues.

Trefis analyzes the potential Impact Of The Covid-19 Recession On Starbucks with a focus on the company’s liquidity reserves and concludes that Starbucks has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Starbucks Revenues 

  • If the outbreak of the virus increases, Starbucks’ demand will be low until the situation improves. As a result, Starbucks’ revenues could decline by about 15% in FY 2020 (ends in September 2020), as a reduction in meeting friends and colleagues for dinners and drinks, and a focus on essentials will reduce the demand.
  • Even with the slow reopening of the economy as lockdowns are beginning to lift, social distancing measures may continue for months, which will impact the number of people willing to go to a restaurant. The social distancing measures will force restaurants to reduce seating, too.
  • In addition to that, the company derives nearly 70% of its revenues from the US, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.

Impact On Starbucks Cash Flows

  • Starbucks cash flows from operations are likely to fall in FY2020 due to a fall in revenues and reduced profitability.  
  • The company might have to offer beverages and food options at a discount to keep the cash flowing. 
  • Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
  • Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $5 billion in 2019 to $3.7 billion in 2020. Also, with expected capital expenditures of $1.4 billion for the year, FCFO-CapEx will be $2.2 million in 2020.

 

Cash Balance Impact

  • This will lead to a 2020 cash balance of $5.2 million, which is higher when compared to 2019. 
  • This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Starbucks can weather a recession through Q4 2020 and a 15% decline in revenues by cutting Capex, eliminating  share repurchases, and suspending dividends. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

An alternative scenario for Starbucks’ cash flows with a 25% decline in revenue instead is detailed as a part of our full analysis.

While Starbucks seems to be in a relatively comfortable position to ride the Covid tide, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

 

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