In my last article regarding Starbucks (SBUX), I reiterated my buy recommendation from the start of the year while raising my price target to $67.50 a share. Since then, shares have moved just under this target as the market has fully priced in the company's global growth story, roughly a 22% gain since my first recommendation. Part of my argument for sustainable domestic growth was the incorporation of its acquisitions in to the greater Starbucks brand. However, I feel Starbucks has moved a little too fast with the roll out of its La Boulange menu offerings. At the end of the second quarter the company rolled out these offerings to its entire Bay Area store base, 439 locations with plans to expand greatly in the years ahead. This year La Boulange pastries will roll out in specific Northwest cities including Seattle, Los Angeles, and Chicago, followed later in the year by New York and Boston. Management plans to have La Boulange products in all of its U.S. company operated stores by the end of 2014.
As the title would suggest, I can't find a single iced lemon pound cake in my area. While I understand the company wants to leverage its La Boulange brand, it shouldn't forget about the array of successful menu offerings it created in the years leading up to the acquisition. At my Bay Area locations, the stores replaced the entirety of the pastries menu, leaving my go to pastries out to dry. Food sales are especially important for the company as these items drive higher ticket sales while aiding gross margins, over 75%. The days of iced lemon cakes, maple scones, pumpkin breads, and classic coffee cakes are coming to an end. Instead, higher priced, copycat versions are now being offered. I've tried many of the new items including the reduced-fat lemon loaf cake but remain disappointed in the taste comparison. Lets take a look at the search interest regarding the keywords "Starbucks Menu" on Google:
A score of 100 represents the highest all time search interest for the keywords. In May the company saw the all time high of 100, followed by a score of 93 in June with a predicted score of 96 in July. The run up in search interest bodes well for the company as it comes at a time during the menu changes. I do fear some consumers, like me, will want the items they were getting for years leading up to the change. Last quarter food comps were strong and in line with its competitors. Later this month the company will report its third quarter earnings, I will be listening to see if management discusses the response to its menu changes.
I am not downgrading Starbucks to hold because of the menu change, I'm downgrading Starbucks to hold because shares have risen to the price target I set using regression analysis and relative valuation (see previous article). I am keeping my price target at $67.50 and will be buying shares on broad market weakness as the long term growth story is fantastic.