Still Not Convinced by Starbucks

I'm not buying into the "get back on Starbucks" (SBUX) train just yet. Schultz is coming back as CEO and the stock was up big after hours. At about 17 times earnings and expected to grow 19% or more going forward in what has proven to be a competitive, margin pressuring coffee market, the stock isn't a screaming buy to me right now. I could be wrong, though; maybe they will find ways to compete more effectively with all the coffee venues and manage nasty commodity costs.

Only, how do you stop Mcdonald's (MCD) and its land empire that may only rival religious churches in total worldwide land holdings? Schultz was brilliant in the conference call and I suspect he will attempt to focus more on the core business of the company instead of going into the music biz as they have tried. They should invest in pre-packaged coffee and coffee beans as those are more profitable. They should try and give the consumer something different than the competition. You'll see them invest in customer service if they are smart. Maybe even sell much lighter roast coffees. Starbucks has traditionally had much, much darker roasts.

I just don't see how one man changes what looks like deteriorating fundamentals and competitive landscape. I assume only the quick buck artists see this. It is not going to be easy even if they do the right things. Starbucks does have some things going for it, like strong brand recognition and big market share. People didn't stop drinking Coke (KO) when competition came in their market. Still, they do have a lot of work to do. Perhaps buying out rival coffee chains like Caribou Coffee (CBOU) and Peet's Coffee & Tea (PEET) will be a last resort. I'm sure shareholders, at least in Caribou's case, would salivate over such a deal.

Disclosure: no position in Starbucks (SBUX), Mcdonalds (MCD), Caribou (CBOU) or Peete's (PEET)

Comments

[brewboy:]

I don't get how Howie Schultz will 'fix things'. Everything that has been done has had his blessing, if not his instigation. HE is the person that made the ridiculous 'promise' of 20,000 store in the USA. Historical reference should have precluded that statement, look at what happened to McDonald's back in the later part of the 90's when they believed they could put stores everywhere and, by being 'convenient', capture all the business. Is it so odd to believe that some people just don't like Starbucks? I'd rather have 12,000 highly profitable stores than 20,000 with 8,000 of them eeking out a small profit or losing money. Add to this that Starbucks has yet to make any significant in-roads into ownership of any of the their real estate so they will continue to experience extreme increases in occupancy costs. At least McDonald's owns a significant portion of their portfolio!

2008 Jan 08 01:38 PM

[Martin Lowe...:]

See one very innovative solution for Howard at www.lompie.blogspot.co... or at Trading, Investing and a look into the future.

2008 Jan 08 04:54 PM