The coronavirus problem
That we’re getting into – are in in fact – a deep and even horrible recession is clearly and obviously true. The US has lost some 10% of all jobs in just the last three weeks, Europe is spending trillions to try to avoid that same number of layoffs. Different approaches to that same problem of the economic slowdown caused partly by the pandemic and partly by the measures to slow its spread.
There’s little that can be done to avoid the existence of the problem. For us as investors the crucial matter is how long is this going to last? This is a point I’ve made before here but it is still that one essential matter. A month, two or three even, is very different from our ending up with a reduced level of output for a year or two.
So, we’re interested in whatever news we can get from China. For that’s where all this hit first so a reasonable enough thought is that we’ll be following in that pathway soon enough. Their curve is our curve that is.
The news is that China is recovering fast, even if it’s not back to pre-Covid-19 levels of consumption as yet.
Starbucks (NASDAQ:SBUX) China numbers
To aid us here we’ve some new numbers from China courtesy of Starbucks. We have an advantage here over many other numbers out of that country in that we really don’t think that Starbucks is going to be reporting numbers to please the Chinese government – which may or may not be true of certain statistical agencies. And we’re also pretty sure that they’re not going to be flannelling us for their own commercial reasons – something that hasn’t been true of the other coffee chain there, Luckin Coffee. You know, the people who have just announced that their recent reported figures have been entirely made up on the COO’s computer?
There’s also that point that China is one of the two major markets for the company (the other being the US) so the numbers are also significant for the stock of the company itself.
During the month of February, Starbucks China’s comparable store sales were down 78% versus the prior year, primarily due to temporary store closures, reduced operating hours and severely reduced customer traffic. The sharpest decline in weekly comparable store sales occurred in the second week of February; however, as disclosed on February 27th, we are seeing early signs of a recovery with sequential improvements in weekly sales. In the last fiscal week of February, relative to the prior week, average daily transactions per store improved 6% and total weekly gross sales in China grew 80%, reflecting the reopening of stores.
That’s horrible, really foul. The newer figures:
Our March 5 letter shared evidence of the China recovery that began in late February. That recovery continued at a slightly faster pace through the month of March, where comparable store sales declined by 64% compared to a 78% decline for the month of February. Each week, we see more evidence reinforcing our belief that the business will fully recover over the next two quarters. For example, in the last week of March, comparable store sales declined by 42%, representing not only the seventh consecutive week of sequential improvement but also the approximate midpoint of recovery from a weekly low of -90% in mid-February.
That’s still pretty bad but it’s a great improvement from that nadir. It’s worth noting that the stores are still operating under restrictions to do with opening hours, the number of people who can be in a store at any one time and so on.
The message we’re getting here is that the downturn is bad, sure, but traffic comes back pretty much as soon as people are allowed out.
The American market
Starbucks’ own conclusion is that the US market will follow the same sort of curve as China. Fall off a cliff then a reasonably swift recovery. Of course, as yet we don’t know what the peak of that recovery level will be and we can surmise that it’s going to be later for optional purchases like take out coffee than it is for other more essential things. What we do already know is that the economy as a whole doesn’t get stuck down there at the bottom.
The stock price already reflects much of this:
We also know that Starbucks is well financed:
Starbucks said it has $2.5 billion in cash and $3.5 billion in short-term borrowings, giving it enough liquidity to get through the tough times. The company temporarily suspended its share repurchase program and will defer capital expenditures and reduce discretionary spending to give it more flexibility. The coffee chain, which will give a full earnings report on April 28, does not expect to reduce its quarterly dividend.
Part of this is using what Starbucks is telling us about China and its economic recovery from coronavirus to predict what our own is going to be like. It’s not all over yet, not at all, but sales levels and economic activity are rising strongly from their lows even if they’ve not, for obvious reasons, got back to where they were.
My reading of this is that we’re in for a two to three month deep recession and then a recovery. We’re in a V shaped downturn that is. This means we should lose little productive capacity from the economy. We’re in a hiatus, rather than a destruction that is.
The investor view
Based upon that assumption about a return to something like normal – a little behind it for sure, but recognisably a development of it – by the fall, maybe late summer, then we want to be in stocks. However, it is usual after a market down turn that risk is repriced. Risker prospects become more expensive – that is, their current price respective to their possibilities falls. It’s the larger and staider companies that prosper in the recovery period.
We this want to be in those larger and staider stocks. Starbucks is a good example of such a stock but this isn’t a specific recommendation for this specific stock. It’s a general observation that large and well established companies are going to do better than the smaller upstarts until we all regain our appetite for risk some years down the line.
Big and boring is our friend right now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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