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Below is a brief excerpt from complimentary research note written by our Restaurants analysts Howard Penney and Daniel BiolsiIf you are an institutional investor interested in accessing our research email sales@hedgeye.com

$SBUX | A Long Road Ahead  - 6 11 2020 1 47 22 PM

While Starbucks sales and profits trends are recovering off the bottom, the company has set a very aggressive target of positive same-store sales by years-end.

According to the company, the pandemic is accelerating a previously undisclosed strategic "repositioning of our U.S. urban store base."

The implication from this strategic shift is a recognition that the company's "third place" strategy had reached saturation.

The company is now rapidly addressing the growing contactless demand for on-the-go occasions, by rolling out pick-up only stores. Theses pick-up only stores carry a much lower cost to build, but small numbers make them immaterial to the overall base in terms of adjusting the current fixed costs to new traffic trends. The growth at scale plan, supporting a long-term double-digit EPS growth model, is undoubtedly one to question at this point. The biggest challenge I see with the current SBUX story is the guidance for positive same-store sales by year-end. 

When confronted with the question “Do you believe that restaurants can fully recover their pre-crisis sales volumes without fully utilizing the dining room capacity?” the answer is "It's early to say."

For someone who did a lot of traveling, I looked for a Starbucks to park my things between meetings.  The seismic shift in how we work, including less travel, will be a governor on the SBUX recovery path. 

CHINA

The good news is that China exited the month of May with weekly comps down 14%, up from the weekly low of about minus 90% in mid-February.

Helping the China business is new product news, innovation around both food and beverages, highlighting the commitment to plant-based milk alternatives, as well as plant-based proteins. 

Guidance is for China to be back to "about flat" by the end of 4Q20.  The improvement in sales is based on:

  1. Innovate mobile offerings, including our Starbucks Rewards program
  2. New product news, both beverages and food (no mention of BYND).

USA

The U.S. exited the month of May with weekly comps down 32%, up from the weekly low of about minus 65% in mid-April. 

The company is targeting comp sales down 10% to 20% in 4Q20 in the U.S. Currently open locations are running down 28% in the recent week, versus down 25% at the time of the April release. 

The company cited sales transfer from having more open stores as the reason for the stagnant performance. SBUX is struggling in dense urban metro markets that are more dependent on customer commuting traffic, where customer patterns or behaviors have been disrupted because more people are working from home. 

In the U.S., urban stores account for about 15% of the total portfolio, and they see varying levels of recovery.  The morning day-part in those markets that will be more challenging to recover for Starbucks.  The levers the company is pulling to drive sales improvements are increased marketing and new channels of distribution, including delivery.

The low average check for a delivered cup of coffee make that opportunity small.