Starbucks Is on the Right Path

SBUX On the Right Road

There is an old saying that if you don’t know where you are going, any road will get you there. Starbucks (SBUX) seems to know where it wants to be and is also taking the right steps to get there. When the bottom starting falling out of the economy in 2008, Starbucks developed a plan for the continued success of its valuable franchise.

In February of this year, Howard Schultz, chief executive of Starbucks, explained his long term plan for future growth and profitability. The essence of the Starbucks turnaround was to cut costs and convince customers that Starbucks coffee was value priced. Mr. Schultz shrewdly based his plans on a forecast that the economy would be weak for a protracted period of time.

I strongly believe we are going to be in this environment for years… it is a reset of both economic and social behavior.

Strategy Starting to Pay Off

The latest quarterly results announced by Starbucks (77% profit decline) would seem disastrous at first glance. Looking beyond the quarterly results, it matters more where Starbucks is going rather than where they have been. The company’s focus remains on cost cutting, selective price cutting and portraying Starbucks coffee as a high quality value priced product. The quarterly profit decline was due largely to the costs associated with store closings. The important metric of customer sales shows improvement from the previous quarter.

The key positive for Starbucks is that the decline in sales had minimal correlation to product quality. Besides introducing some new coffee products such as the Pike’s Place blend, the basic Starbucks menu was not changed. Starbucks continues to deliver a high quality product and is adjusting their business strategy to reflect the reality of weak consumer spending. The company is strong financially with a modest amount of net long term debt.

Profit From Short Term Weakness

Starbucks is one of the great American success stories. None of Starbucks’ basic success ingredients have changed - superior management and a great product sold in a pleasant environment by friendly and well trained employees. The company is taking the right steps to reposition itself for future growth. The bad news has probably been discounted, making the stock a great long term buy. The flight to safety play is becoming yesterday’s strategy. What would you rather own today - a five year treasury paying sub 2% or an ownership interest in a great American franchise?

Courtesy: stockcharts.com

Disclosures: Long SBUX

Comments

[swoody:]

I agree... Best days of Starbucks is still coming... Just go to China or oversea! People love starbucks.

Starbucks has one of the largest FAN following on facebook...over 1.5 millions Fans! Versus Mcdonald... only a handful of fans!

No company matches the image and be able to make cash like STARBUCKS!

Apr 30 12:10 PM

[sfosri123:]

Most people in this recession have realized that Coffee from McDonalds tastes as good or better than Starbucks without the high prices. Many of them will not be going back to Starbucks since they now know they have been ripped off all these years.

The fact that Starbucks is now introducing Instant coffee which they derided all these years is proof that this company will do anything for profits and sacrifice any principles they pretended to have.

With Peets coffee being one of the sole chains that still care about quality and a good customer experience and better prices than McDonalds, I would put my money on Peets instead.

Apr 30 08:48 PM

[sfosri123:]

I meant better prices than Starbucks not McDonalds

Apr 30 08:49 PM

[sundrenched:]

I think people overestimate the overseas potential and brand loyalty in general. The concept is easily copied and indeed improved upon by local competitors. I travel a lot in Asia, Europe and the US, and in almost every country you can find a local alternative that does it better than Starbucks: better coffee, more comfortable furniture, better music (note to Howard Schultz: stop putting on that free Jazz crap -- it's annoying, not "hip"), healthier, fresher and better-tasting food, more variety (for instance, non-fat, no-sugar smoothies)... Those are the things that drive people's choice a long way before Brand. Or put another way, there's little competitive moat.

What pisses me off the most about Starbucks is that they pretend to be a premium chain and Howard Schultz keeps disparaging the competition, but so many times I've had: burnt coffee, lukewarm coffee, Americano as light as tea (do these barristas get any training?), stale scones (at least 2 days old, on one occasion it was powder dry), overfriendly/smarmy personnel, annoying cross-selling, dirty sofas (2 days worth of food between the cracks), etc. The contrast with Howard Schultz's hype is what makes it so annoying.

The current price completely puzzles me. It's priced like a growth stock, without the growth. There's so many other, better places out there for my money.

May 02 06:08 AM

[doubtfulsha...:]

Starbucks is doing "well" right now, because of the 'trickle down' effect... most "positive/profitable" changes have been made by placing more and more stress on the partners at store level...labor has been cut, responsibilities on the lowest level have been raised, training is minimal, layoffs and closings loom ... just a few years ago BEFORE the economic downturn in this country, Starbucks stocks were already sliding down from well over $30 per share to the $20's per share...because of bad management decisions. This company micro-manages their stores into the ground. I wonder if shareholders know that required promoting...PUSHING...the food/coffee combo meals takes precidence (sp?) over making a PROFIT! Store managers are being vilified for choosing to make a profit instead of losing them by heavily promoting and selling the combo meals (which Starbucks loses money on) ...The atmosphere for the lowly store laborers is getting worse by the day, and in turn, the service end of the business is not so great anymore ... the stores are getting dirtier, the baristas surlier, and the focus on coffee seems to be gone ... the pressure to make sales of many 'here today gone tomorrow' new products has trickled down to the minimum wage earners (who are never asked what they think their customers really want)...Starbucks is beginning to get what they pay for...the stocks may be rising now...but when the "third place" starts looking like McDonalds, I wonder where the stocks will go then???

May 08 08:57 AM