Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Can Starbucks (NASDAQ: SBUX) Survive?

Starbucks (NASDAQ: SBUX) could lose everything to coronavirus. Starbucks business is to offer a social space where people can gather for talk or business.

To pay its bills, Starbucks sells coffee, drinks, and snacks at a higher price. Before coronavirus, that business was successful but huge. I estimate Starbucks operated 15,041 retail locations in the United States in third quarter 2019. In detail, Statista estimates Starbucks operated 6,250 licensed stores and 8,791 company stores in November 2019.

Coronavirus has closed most of those locations and killed Starbucks business of offering a place to meet. To explain, nobody wants to get together to drink coffee, talk, and share snacks or hold a business meeting with coronavirus around.

Will Coronavirus kill Starbucks?

The latest financial numbers show coronavirus is hurting Starbucks. Starbucks’ quarterly revenues; for example, fell from $7.097 billion on 31 December 2019 to $5.996 billion on 31 March 2020.

Additionally, Starbucks’ quarterly gross profit fell from $4.861 billion to $3.998 billion in the same period. Moreover, Starbucks’ quarterly operating income fell from $1.219 billion on 31 December 2019 to $487.40 billion on 31 March 2020. Starbucks’ quarterly common net income fell from $885.70 million to $328.40 million in the last quarter.

Dramatically, Starbucks’ quarterly operating cash flow fell from $1.836 billion on 31 December 2020 to -$1.361 billion on 31 March 2020. Consequently, Starbucks’ ending quarterly cash flow fell from $3.041 billion on 31 December 2019 to -$468.20 million on 31 March 2020.

Starbucks is Borrowing Money to Survive

Tellingly, it appears Starbucks is borrowing money or issuing debt to finance its operations. To explain, Starbucks reported a financing cash flow of $1.273 billion on 31 December 2020.

The financing cash flow shows how much money Starbucks received through borrowing. Notably, the company’s financing cash flow rose from -$1.123 billion on 31 December 2020.

However, Starbucks had some cash left. Starbucks reported $2.625 billion in cash and short-term investments on 31 March 2020. Starbucks’ cash and short-term investments fell from $3.108 billion on 31 December 2020.

What is Starbucks?

I think Starbucks; like McDonalds (NYSE: MCD), is a real estate company. To explain Starbucks (NYSE: SBUX) or its licensees buy or lease prime real estate in high-traffic areas.

Unfortunately, coronavirus is changing the high-traffic areas and the value of Starbucks’ properties. For example, a location on a busy downtown street corner or in a train station worth less because fewer people are commuting.

On the other hand, a Starbucks with a drive-thru in the Costco (NASDAQ: COST) parking lot or a Starbucks in a busy Kroger (NYSE: KR) Marketplace could be worth more. To elaborate, sales at Costco are booming because of coronavirus. In fact, Costco claims its sales grew by 12% during March 2020.

Coronavirus could stick Starbucks with many worthless locations. Conversely, the value of other Starbucks locations could double or triple.

Will Drive-Thru Save Starbucks?

Consequently, Starbucks will have the expense of shifting resources to the more profitable locations. Starbucks has the cost of closing less profitable locations.

Another huge expense Starbucks could face is adding drive-thru at more locations. Drive-thru can offer perfect social distancing and they keep open during stay-at-home orders.

Moreover, Starbucks could integrate drive-thru with delivery. For example, a Grubhub (NYSE: GRUB) or Instacart driver could pick up lattes from the Starbucks drive-thru and deliver them. In particular, customers could order coffee through the Starbucks app.

Under these circumstances, I think drive thru could be Starbucks future. Hence, the most valuable Starbucks locations could those with easy access to high-traffic streets in suburbs.

Are Ghost Coffee Shops Starbucks future?

An interesting innovation could be an all-drive thru Starbucks or a Starbucks in a ghost kitchen. To elaborate, ghost kitchens are facilities where they cook food that services such as DoorDash deliver. Starbucks coffee is an obvious addition to ghost kitchens.

Another interesting concept could be a ghost coffee shop that makes Starbucks drinks only for delivery services. They could locate a ghost coffee shop in a supermarket or an abandoned J. C. Penney’s (NYSE: JCP) store.

One company that could cash in on ghost coffee shops is Kroger (NYSE: KR). To explain, Kroger is already a major player in grocery delivery, it operates 2,757 supermarkets and supercenters in the United States, and has Starbucks locations in many of those stores.

Kroger already prepares millions of takeout meals and cups of coffee in its stores. Therefore, I think Kroger has the resources to profit from ghost kitchens.

On the positive side, Starbucks could benefit because it has retail-locations in many Starbucks stores. On the negative side, the popularity of ghost kitchens and delivery could destroy the value of many traditional Starbucks stores.

Is Starbucks a Good Stock?

I think Mr. Market overpriced Starbucks (NASDAQ: SBUX) at $76.31 on 18 June 2020.

Moreover, Mr. Market thinks Starbucks is vulnerable to coronavirus. Starbucks started 2020 at 2 January 2020 and fell to $76.98 on 16 June 2020 and $76.31 on 18 June 2020. Starbucks shares hit bottom at $56.33 on 18 March 2020.

I think Starbucks cannot retain its share value because of shifts in the retail market. In addition, Starbucks is vulnerable to debt and fast collapse. However, Starbucks’ brand is powerful but could be hard to maintain.

Starbucks’ revenue growth rate fell by -4.92% in the quarter ending on 31 March 2020, Stockrow estimates. In contrast, Starbucks revenues grew by 7% in the quarter ending on 31 December 2019.

Is Starbucks capable of Growth?

Hence, I think Starbucks is not capable of growth in today’s market. Therefore, I conclude Starbucks’ margin of safety is collapsing.

Interestingly, Starbucks could shift from a safe consumer brand to a speculative stock. To elaborate, Starbucks future value could be in unproven businesses such as delivery and ghost coffee shops.

Plus, Starbucks could face higher labor costs and some other problems. Labor costs could rise because there are no tips in ghost kitchens. Hence, employees could demand higher pay and have more incentive to unionize.

Could the $15 an Hour Minimum Wage Hurt Starbucks?

There is a growing $15 an hour minimum wage movement in America that could increase Starbucks expenses. Importantly, probable Democratic presidential nominee Joe Biden (D-Delaware) claims to support a $15 minimum age.

The $15 an hour wage could threaten Starbucks by raising its labor costs. Starbucks could have to pass its growing labor costs onto consumers. Presently, Americans pay $5 to $10 for a latte, but will they pay $12 or $15 for a latte?

Is Starbucks a Good Dividend Stock?

Strangely, I consider Starbucks (NASDAQ: SBUX) an outstanding dividend stock. Starbucks paid a 41₵ quarterly dividend on 7 May 2020. credits Starbucks with a 2.26% forward yield, a 162.36% payout ratio, and nine years of dividend growth on 16 June 2020. Hence, I think Starbucks was an excellent consumer stock with a high margin of safety before coronavirus.

However, today I consider Starbucks a speculative stock with a low margin of safety because its market fell out from underneath it. Therefore, coronavirus is an outstanding stock for people who think normalcy will soon return to buy.

I, on the other hand, think normalcy is dead. Given that reality, I believe Starbucks is a speculative stock with a lot of potential value and enormous risks. Currently, I advise those who need a high margin of safety to avoid Starbucks.  

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