Starbucks’ strong Q1 overshadowed as it sounds warning on coronavirus outbreak

Starbucks has temporarily shuttered more than half of its stores in China in response to the coronavirus. 

On its quarterly earnings call with analysts, Starbucks executives warned that the viral outbreak could “materially affect” its fiscal 2020 results. Starbucks had 4,292 stores in China at the end of last year. The country is the chain’s second-largest market and accounted for 10% of Starbucks’ revenue during its first quarter.

Starbucks CEO Kevin Johnson told analysts he had anticipated raising the company's financial forecast for 2020 when it reported earnings. But he decided not to due to “the dynamic situation unfolding with the coronavirus.”

“The magnitude of the impact will depend on the duration of store closures as we work with local authorities to manage the situation and protect our partners and customers,” CFO Pat Grismer told analysts.

In a prepared statement, Johnson said the company would be “transparent with all stakeholders in communicating how we are responding to these extraordinary circumstances and the implications for our near-term business results.”

The news about the China store closings overshadowed what was an impressive first quarter for the coffee giant and one of its strongest holiday seasons ever. Starbucks reported net income of $885.7 million, or 74 cents per share, in the quarter ended Dec. 29, up from $760.6 million, or 61 cents per share, in the year-ago period. Excluding the impact of restructuring and impairment costs and other items, earnings totaled 79 cents per share, topping the 76 cents per share expected by analysts. 

Net sales rose 7% to $7.1 billion, in line with expectations. Global comparable store sales rose 5%, driven by a 3% increase in average ticket and a 2% increase in comparable transactions.

U.S. same-store sales rose 6%, boosted by more customers visiting its cafes. 

“Our growth was fueled by a healthy balance of comparable sales growth and new store development, as well as continued expansion of our global coffee alliance with Nestlé. Investments in our partners, beverage innovation and digital customer relationships contributed not only to strong topline growth, but also significant margin expansion in the quarter,” Johnson stated.  

Starbucks reaffirmed its fiscal 2020 forecast but said it was excluding the impact of coronavirus. Under its current forecast, its fiscal 2020 revenue is expected to rise between 6% and 8% and global same-store sales growth will be in a range of 3% to 4%.

“The company will update its guidance for fiscal 2020 when we can reasonably estimate the impact of the coronavirus,” Starbucks said in the earnings release.

Starbucks had 31,795 stores at the end of the first quarter, up 6% over the prior year. It expects to add 2,000 net new locations worldwide in fiscal 2020.