DJ Eating In for Breakfast Is Healthy, but Not for Starbucks and McDonald's -- Barrons.com
By Teresa Rivas
Your mother probably told you to eat a healthy, balanced breakfast. Did you listen? Perhaps not until now, as the Covid-19 pandemic has forced many more of us to stop eating at fast-food restaurants for what health advocates consider the most important meal of the day.
Just look at McDonald's (ticker: MCD) and Starbucks (SBUX). The quick-service giants both reported earnings on Tuesday, and while there were some positive aspects of the results, breakfast sales continued to be a laggard.
With millions of people unemployed and millions more working remotely, many people no longer have a morning commute, or have the spare cash for a pricey coffee and breakfast sandwich. Add in people's increasing comfort with cooking for themselves, and delayed reopening plans in some areas badly affected by the virus' resurgence, and there is little incentive to get up early and go out to eat.
The problem is bigger for Starbucks, given it is more levered to the early part of the day, and has a higher proportion of its stores in urban areas with no drive-throughs. It's no wonder then that the shares have fallen more than 12% since the start of 2020.
The company estimated it lost more than $3 billion in sales in its most recent quarter because of the pandemic, and it appears that the Chinese market, where Starbucks has a large footprint, won't rebound as quickly as some bulls had hoped.
Analysts have been quick to argue that the company has the wherewithal to survive recessions and emerge stronger, and CFRA analyst Tuna Amobi upgraded Starbucks to Buy from Hold, with a $90 price target, arguing that the company as an "ample liquidity buffer" of more than $4 billion, and the most recent quarter will likely be a "trough for the severe financial hit" it is seeing as a result of Covid-19.
Eventually there will be a treatment or vaccine and regular life can resume, including breakfast on the go. The question is how patient will investors be, especially if more lockdowns happen this winter.
Starbucks shares rose 3.7% to $77.42 on Wednesday, as the S&P 500 rose 1.2%.
McDonald's has the advantage of not being as dependent on breakfast as Starbucks is. The morning meal accounts for about a quarter of its sales. However, in its most recent report it said was gaining market share in breakfast, which RBC Capital Markets' analyst Christopher Carril suspects it is taking from independent restaurants, many of which remain closed or are operating with reduced scale and hours.
The company has highlighted innovation, speed of service, and increased marketing as competitive advantages in the breakfast segment, allowing it to claw back some business. It's shares are up 0.7% year to date, close to the S&P 500's 0.9% gain and well ahead of the 7% loss for the Dow Jones Industrial Average.
Investors probably started the year with different hopes, and many of McDonald's plans were put on hold, including an increased focus on breakfast, improved drive-through speeds, and a new chicken sandwich. Yet Evercore ISI's David Palmer wrote that it's worth noting that the company's U.S. business "leads the world," with comparable sales in the low-single digits and steady share gain. "Covid has provided a crash course in why McDonald's trades at a premium," he concluded.
In short, breakfast may be the last meal of the day that Americans start to regularly dine out for again, but patient investors shouldn't discount the staying power of the biggest players.
Write to Teresa Rivas at teresa.rivas@barrons.com
(END) Dow Jones Newswires
July 30, 2020 06:59 ET (10:59 GMT)
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