Starbucks Not Doing Enough to Heal - Deutsche Bank

Forget the half-caf dark roast blend, non-fat lattes and mint chocolatey chip frappuccinos for a minute, it's time for some plain talk at Starbucks Corp. The company recently reduced its number of international store openings, reported a 97% decline in fourth quarter earnings and provided a gloomy forecast for the coming year.

It appears that more than cost cutting is needed to halt the “corrosive” drop in profits and returns, which has caused a two‐year decline in market value of 80%, according to Deutsche Bank analyst Marc Greenberg.

He told clients:

Only when strategy moves to blunt the impacts of competition, over‐ saturation, and a misplaced value proposition for today’s consumer can the healing begin. We remain circumspect.

The Seattle-based company hopes holiday merchandise at lower prices than last year and discount cards will help it transition from a high-priced drink retailer to a chain that offers value. But doubts remain whether it will be able to keep its loyal customers coming back in the face of a consumer-spending slowdown.

Mr. Greenberg said the expected reduction of 20 U.S. stores in fiscal 2009 remains too low if the company wants to improve comps and operating leverage. International expansion despite weakening performance and macro conditions pose similar risks abroad. He suggested that a more realistic discussion of the effect of declining consumer spending and Starbucks’ measures to adapt is needed, along with an acknowledgment of the competitive impact.

The analyst also said management’s cost reduction plan that calls for $200-million in savings in 2009 needs elaboration, along with the implications the abrupt departure of its CFO has on the long-term goal of ensuring the store base and costs are appropriate.

Mr. Greenberg’s fiscal 2009 earnings estimate of $0.66 per share remains below consensus and guidance as he sees no evidence that Starbucks’ performance has bottomed or that its margins will improve significantly. The analyst rates the shares a “hold” with a $10 price target.

Comments

[Mowog:]

Every Starbucks I see here in Japan is usually full of people and no listed drink costs $5. I tall brew-of-the-day is about $3.5. However, I do see lots of students and housewives taking up valuable real estate whlie nursing the cheapest drinks on the menu.

2008 Dec 03 10:55 PM