The Starbucks Sequel: What's in My Coffee for 2008?

"Starbucks (SBUX) is done!" This is what Goldman proclaimed two weeks ago when it downgraded the company to neutral. In fact SBUX's shares have been hammered down by slower US same-store-sales (+4% in FY07), declining new store productivity, margin erosion and concerns over saturation. That we knew. And yet, we keep ordering our coffee- cup after cup (most of us traders now need serious teeth whitening!). So what's the story, where are the profits and why is the company gone sponsoring idiotic PR stories such as this one? Do they really need the help?

Most investors I talk to hold Starbucks for the long term. They were right to make such a decision two years ago, however, the stock hit a all-time-high in 2006 and since has traded range-bound and mostly, downhill. If we follow the lessons of the best traders such as Linda Raschke, which I hope you aspire to become, we would have sold around February of 2007 at $33 and not have to endure shockingly low prices of close to $20 (last week).

So yes, most of the investors out there ride for the long term and on the wrong side of the market. I want you to see it and learn from their mistakes. Wall Street analysts still view SBUX as a long-term story. Unfortunately, there are no catalysts yet in the short term to reverse bearish sentiment. Shares are more likely to remain range bound and with another challenging quarter, and negative consumer sentiment, there is a little hope for short term sales acceleration. And frankly, how do you charge close to $2 for a small cup of coffee and not have competitors breathing in your neck?

Longer-term, yes, I see Starbucks' leadership position (great real estate) in the rapid specialty coffee segment domestically (the specialty coffee market is worth $11bill) with a solid infrastructure to support growth in its International markets. But I also see same-store cannibalization as an issue.

In this industry SBUX is a clear leader, but smaller coffee competitors have nevertheless successfully differentiated themselves using everything from atmosphere to product mix to regional specialization. They are coming in droves. Take a look at Green Mountain (GMCR). It has a chart that's clear opposite of SBUX. How is that for a clear tell of where the healthier stocks are in the field?

Lastly, I want to provide a little something, for your reading pleasure to keep you going on the last day of 2007. Here is a list of competitors to research - the best way to get a grip on the industry and figure out what's in our coffee for 2008. And please, feel free to send me comments on what's filling your cup for 2008.

Competitors:

1. Green Mountain (GMCR)
2. Coffee Bean & Tea Leaf
3. Costa Coffee, London
4. Caribou Coffee (CBOU)
5. Pete's Coffee and Tea (PEET)

Comments

[freakyguy666:]

What is the point of the article? We all know that the stock price is lower. We all know that there is competition. We know that it would have been better to sell when it was near its peak. But that is OLD INFORMATION! Who the heck cares?!? And you say that you "want [the readers] to see it and learn from their mistakes". What does that mean exactly?? Are you suggesting that somehow it was a GIVEN than SBUX would lose this much value in 2007? If so, it would have been much more interesting to read your opinion of the tell-tale signs of the impending decline. Hindsight is 20/20, and this article is just standard media drivel and provides nothing new.

I'm not even sure that the author even has an opinion on whether the stock is a good prospect for 2008? Is it? I, for one, would think that the international growth potential for SBUX is completely discounted out of the stock price at this level ($20) and given that is has the potential to completely eclipse the sales SBUX has enjoyed thus far, I would be surprised if SBUX did not outperform in 2008.

Happy New Year.

2008 Jan 01 02:30 AM

[artgypsy:]

It appears Starbucks need to take a new approach in marketing. Maybe free wifi? That would be good start when Panera offer the free connection.

2008 Jan 01 12:42 PM