We will be hosting a Black Book presentation on Monday, March 23rd, at 12:30 pm E.T. to discuss our SHORT thesis on SBUX.
The first move down from $90 to $50 was the 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.
On Friday, the company announced it would be closing its store for two weeks, but keeping the drive thrus open. Two weeks would be a minimum, but 3-4 weeks is more likely. The company also announced it was closing stores in the U.K. What about the balance of Europe and Asia?
Three reasons to be SHORT:
THE GLOBAL SHUT DOWN - The global economy is shutting down, and the restaurant industry is one of the hardest hit. Millions of consumers in the U.S. and globally are losing their jobs. A bulk of those job losses will come from the restaurant industry. Currently, 86 million Americans are on lock down. Will Starbucks stores stay closed for only two weeks? Starbucks products are expensive relative to its key competitors and other stay-at-home alternatives. It could be May 2020, before we begin to recover, and it will not likely be a V-shaped recovery.
BIG REVISION COMING - Across the entire consumable space (Discretionary, Staples & Restaurants), consensus numbers are a useless metric. For Starbucks and the balance of the Restaurant Industry, we know where the numbers are going. Lower, a lot lower! 2020 is not 2008; it's multiple times worse for the Restaurant industry and Starbucks in particular. Job losses are a big problem for the company. The decline in sales and traffic is staggering. Starbucks might be lucky to earn $2.00 in 2020, 30% lower than the useless estimates. Using a much different base in 2021, forecasts in the out-year could come down by 40-50%.
UNPREPARED - Based on the made for T.V. interview, the CEO did on CNBC last week; the company seems to be operating like this is a one-quarter problem! Does unit growth need to slow or even stop? Are they cutting expenses to help mitigate the massive decline in traffic globally? What will come of the third pace business model? How long will it take the consumer to return to normal? Do consumers need to be enticed back with lower prices and increased advertising? The company said it was buying back stock last week! Even MCD said it halted its buyback, and it has a better balance sheet!
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