I read and respected the article written by Seeking Alpha contributor Todd Sullivan regarding his outrage at Starbucks (NASDAQ:SBUX) management team. The CFO was quoted at a conference claiming the high end of Wall Street's earnings range of $.87-.89 "will be challenging". I understand Todd's anger, as Starbucks management has been somewhat in denial about improved competition, and now, increases in the price of milk.
So where do we go from here?
Ultimately, that's the key question for current shareholders and potential new shareholders. Starbucks has been a mega-success story of the past 10-12 years. Arguably, they dominate the coffee sector and currently they have over 11,000 units world-wide. With ambitious plans to expand the store base to 40,000 units over the next decade, Starbucks is and will continue to hit stumbling blocks and growing pains. Like right now.
The hints were prevalent earlier this year when an "inside memo" from Chairman and founder Howard Schultz was leaked to the media. Never mind the leak, it was the message that was interesting. Schultz expressed concern over complacency from store level managers and district managers. Prescient as it was, perhaps Schultz was more than "thinking out loud". He saw something that his company needs to address and fix now.
Starbucks is the winner in the category and the future growth of units is spectacular. But the issue is to dot the I's and cross the T's along the way. Starbucks has been trying various additions to its menu, particularly with food items. The music and movie offerings are well-run and should provide continuing incremental growth opportunities, but its the execution at the store-front level that is critical.
I believe Starbucks can earn $.87-.88 for this fiscal year ending September 30th and $1.08-1.10 for fiscal year 2009. Cost management without sacrificing the customer experience is vital to its success and ultimately its stock price. Starbucks has never missed a quarterly expectation...yet. The stock still carries a premium multiple, deservedly: but it has to be earned every quarter.
Starbucks needs to weather this storm and resume its growth trajectory if it has any hope of attaining a $50 billion market cap and beyond. The first hurdle must be cleared.
I believe the stock is a buy here at $26 for the patient investor. With execution of its detailed business and growth plan, the shares should maintain a premium valuation and look for a $35 price target over the next 9-12 months.
SBUX 1-yr chart