Starbucks said its COVID-19 efforts began in late February, well before the crisis reached peak levels. The java chain had some insight into what could be coming.

In late January, Starbucks shuttered more than half of its 4,300 China locations—a move that impacted 58,000 employees. Sales collapsed 78 percent, year-over-year, and were headed for a full 50 percent drop in Q2. The decision was predicted to run Starbucks between $400 million to $430 million in lost revenue, compared to previous projections.

But these choices also fueled a steady business recovery, the company said Wednesday in a securities filing. More than 95 percent of Starbucks’ China restaurants are now open, although many continue to operate under reduced hours and limited seating. Similar improvements are underway in South Korea, too, “which reinforce both the resilience of our brand as well as our success in replicating our recovery model across markets as people are able to return to their daily lives and work,” the company said.

And that brings us to the U.S., where Starbucks said its China experience is directly influencing domestic response. Before March even arrived, the chain rolled out elevated cleaning and sanitizing protocols. It then began temporarily closing mall locations and other restaurants with high levels of customer congregation. By March 15, Starbucks darkened seating in favor of to-go-only locations, which marked the first major domino in a week of similar shifts among quick-service peers.

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On March 21, the company, citing a struggle to keep crowds at bay, shut the doors entirely systemwide, keeping only drive thru and delivery live (some to-go service stayed open in cafes that serve frontline responders and healthcare workers). It expects this to continue into May.

And, unsurprisingly, precipitous sales declines followed.

Building on one of the most successful holiday quarters in Starbucks’ history, the company’s domestic business was booming in Q2, it said. Quarter-to-date as of March 11, U.S. same-store sales growth was 8 percent, with traffic up 4 percent. Those represented the strongest top-line results Starbucks had delivered in four years.

On March 12, as was the case for much of the industry (here’s data that reflects the tipping point), sales began to steadily worsen as “shelter-in-place” mandates and social distancing requirements crippled retail trends. During the last week of March, Starbucks’ comps stabilized in the range of negative 60–70 percent, with 44 percent of U.S. corporate locations still operating. Most remain under modified store hours and primarily via drive-thru.

A look at how Starbucks’ business was surging pre-COVID-19:

U.S. and Americas same-store sales:

• Q1 2020: 6 percent
• Q4 2019: 6 percent
• Q3 2019: 7 percent
• Q2 2019: 4 percent
• Q1 2019: 4 percent
• Q4 2018: 4 percent
• Q3 2018: 1 percent
• Q2 2018: 2 percent
• Q1 2018: 2 percent

 

Global same-store sales:

• Q1 2020: 5 percent
• Q4 2019: 5 percent
• Q3 2019: 6 percent
• Q2 2019: 3 percent
• Q1 2019: 4 percent
• Q4 2018: 3 percent
• Q3 2018: 1 percent
• Q2 2018: 2 percent
• Q1 2018: 2 percent

 

But unlike many quick-serves with scale, Starbucks’ drive-thru footprint isn’t massive. At quarter’s end, 58 percent of company-run restaurants were drive-thru locations. And only 76 percent of those were open. Additionally, roughly 55 percent of Starbucks’ licensed stores remained open—the vast majority of which were in grocery stores. The chain runs about 9,000 corporate units stateside, with licensees overseeing another 6,000.

Notwithstanding the strong start to the first 10 weeks of Q2, comparable domestic sales declined about 3 percent versus the prior year, which reflects the rapid onset of COVID-19. Essentially, a three-week hit in a 13-week window dragged comps from plus 8 percent to negative 3 percent.

A deeper dive into Starbucks’ China sales trends could provide some insight into why the chain took such quick and drastic measures.

In March, China same-store sales declined by 64 percent compared to 78 percent in February. Each week, Starbucks said, it continues to see additional evidence reinforcing its belief that the business will fully recover over the next two quarters.

For example, in the last week of March, China comps declined 42 percent. This was not only the seventh consecutive week of sequential improvement, but also the approximate midpoint of recovery from a weekly low of negative 90 percent in mid-February.

Additionally, as recovery progressed, a return to in-store transactions was reflected in the mix of mobile orders, which accounted for 27 percent or so of China’s sales mix during the final seven days of March—down from about 80 percent in the last week of February.

Starbucks even resumed development activities toward the end of Q2, opening two new stores, including a Starbucks Now in Shenzhen.

Giving the timing of COVID-19 in the U.S., the chain expects the negative financial impacts in Q3 to be significantly greater than Q2 and to extend into Q4. It’s likely to be much larger than a 3 percent decline, in other terms. “In any event, based on our substantial experience in China to date, we continue to believe that these impacts are temporary and that our business will fully recover over time,” Starbucks said.

BTIG analyst Peter Saleh said Thursday in a note Starbucks—and restaurants in general—are staring down a lengthy recovery trail. “While we believe the issues related to coronavirus are transitory, we are not yet convinced that consumers will fully return to their prior purchasing habits when lock-downs are lifted in the U.S. We expect staggering sales declines in April, followed by some recovery in May and June that gets comps back to positive in [Q4].”

The company withdrew its guidance for fiscal 2020 given the uncertainty, but did say it expects Q2 GAAP and non-GAAP earnings per share to track roughly 28 and 32 cents, respectively.

At the end of Q2, Starbucks had about $2.5 billion of cash and cash equivalents on its balance sheet. To free up additional liquidity, it executed a $1.75 billion bond issuance on March 10, with the use of proceeds earmarked for repayment on its outstanding commercial paper, backstopped by its $2 billion, five-year credit facility and $1 billion, 364-day credit facility. Further, on March 20, Starbucks executed an additional, $500 million term-loan facility.

The moves give Starbucks $3.5 billion in short-term borrowing facilities to provide ready access to funding as needed. The company also temporarily suspended its share repurchase program and is taking steps to defer capital expenditures and reduce discretionary spending, it said.