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Takeaway: Our call on SBUX is very straight forward! The erosion in profitability will be swift and fast!

Editor's Note: Below is a complimentary research note written by Restaurants analysts Howard Penney and Daniel Biolsi. To access our institutional research please email sales@hedgeye.com.

Best Idea Short | $SBUX | Are You Kidding Me? - 3 19 2020 9 54 44 AM

The first move down from $90 to $50 was a multiple contraction and an early impact on the company financially due to the operations in China.

The street estimate is for global same-store sales in 2Q to be -2.9%, with The Americas up 4.7% and international down 29.5%.  The corresponding decline in EBITDA is 14% for 2Q20.  None of those numbers are even in the zip code of being right! 

The next move from $50 to $25 will be due to significant erosion in profitability. 

In cities with a significant number of COVID-19 cases (Seattle and New York), Starbucks' (SBUX) stores are either operating at reduced hours or temporarily closed to the public.  My local store was take-out only for a few days then it closed permanently. Why are Starbucks stores even open at all?  Is the company risking the health of its employees by remaining open?

"As we navigate COVID-19 together, what matters most is how we, as a company, care for you," a company executive said in a letter to employees posted online. “I want you to know that here at Starbucks; you should never have to choose between work and taking care of yourself.”

Several restaurant companies are having trouble staffing in the environment, and Starbucks is one of them.  As Starbucks' employee staffing issues grow, so does the likelihood that the company will close more stores in the US.

We will have more details next week in our Industry update call.

The chart below looks at the relationship between Starbucks' same-store sales and EBITDA from 1Q08 to 3Q10.  Given the prolonged erosion in same-store sales we are seeing globally, the decay in profitability will be significantly more than in 2008-2009.

Best Idea Short | $SBUX | Are You Kidding Me? - 3.19 v1