Starbucks Q1 - Good Growth, Virus Concerns

On Tuesday evening Starbucks reported their Q1 numbers. The company made more money than analysts were expecting but had slightly less revenue - a top-line miss with a bottom-line beat. Even though the earnings report looked solid, the stock dropped 2% yesterday. With something like jewellery or handbags, if there is pent up demand due to the China shutdown, those customers will come back after the shutdown and still spend all that money. Looking at coffee though, if you don't buy a drink today, you won't go and buy two tomorrow. For Starbucks, over half of its Chinese stores have been closed due to the coronavirus. Those sales will be lost forever.

At the moment, only 10% of Starbucks' revenues comes from China. So even if the shutdown lasts much longer than expected, they will be able to weather this storm. It will mean lower short-term profits. We are here for long term profits though, and we are here to benefit when Starbucks takes its current China store count of 4 300 to over 10 000 in the coming decade.



Here are the highlights from the results. The US market, the company's most important territory, is seeing an increase in foot traffic and order volumes. This is thanks to Starbucks staying on top of food trends. They are starting to offer dairy alternatives to customers, like almond milk, and are also going to offer plant-based meat alternatives. The next reason for the increased foot traffic is because food delivery is taking off. People can now order their double shot, skinny latte, with a squirt of hazelnut directly to their desk. Having more sales from existing stores means that profit margins are expanding. Who doesn't like to make more money from the same asset base?

Three quick reasons why you want to own Starbucks: 1)They have a strong brand and a very loyal customer base. 2)The US business is becoming more profitable. 3)For the massive growth opportunity in China, once the current hurdle has been passed.