Starbucks is Struggling for Renewed Success

Are the recent changes at Starbucks (SBUX) a sign of promise or of a company gasping for air? At the company's recent shareholder meeting, Howard Shultz emphasized that Starbucks will be returning back to basics, back to how it rose to being a global powerhouse.

The stock is down over 40% over the last 12 months. It is far off its 52 week high of $32.45. No catalyst is in sight and sales of $5 lattes are not likely to improve when gas costs $3.25 per gallon and consumer confidence is shaken.

In January, Starbucks tested $1.00 coffee in Seattle to see the results, as McDonald’s (MCD) and Dunkin' Donuts both offer their coffee in this price range. McDonald’s, the billion dollar corporation, is now stepping onto Starbuck’s turf offering ice coffee, and while Starbucks is scaling back, Dunkin’ Donuts has just announced it will be adding 100 new locations in Michigan in the future.

What can Starbucks do? It will try a range of measures: it will bring in wider use of the Mastrena, the new expresso machine, to 75% of Starbucks branches, according to Howard Shultz. Starbucks will also introduce a new energy drink, and a new coffee blend, add new customer loyalty cards in the near future, and retrain baristas. It will discontinue its breakfast sandwiches and close about 100 underperforming stores. Last month the company announced that it was cutting 220 corporate level jobs and won’t be hiring 380 jobs that were planned. Starbucks has become so mainstream that it is not offering anything spectacular to keep its growing competition at bay.

This stock is dead weight for now. When Howard Shultz shows results, then I would consider a position.

Disclosure: I do not have a position in any company mentioned in this article.

Comments

[firefox2]

FYI: SBUX was recently a buy on Motley Fool's Million $$ Portfolio...

[Mikebrah]

Couldn't disagree more with this article (and the swarm of others making the exact same argument).

For the past 6 months all I have heard is how bad of a buy SBUX is and how great a buy MCD is. I would (and soon will) happily take the other end of that trade. SBUX and MCD have roughly the same forward multiple, and yet with all the bad press its getting SBUX still has a higher expected growth rate, and SBUX's international growth is in a much younger stage than is MCD's.

So what if McDonalds makes gourmet coffee? Skechers could start making basketball shoes, but that doesn't mean people will stop buying Nike. SBUX customers won't be switching anytime soon. You could get McDonalds quality coffee at home, or at a good gas station. Plus, if you buy MCD coffee that means you have to drink it at MCD, right? Although many people take theirs to go, I can't see MCD blossoming into coffee-shop hangout atmosphere. SBUX customers will continue their patronage.

As to the recession argument, I think coffee (in all its forms) is as recession-proof as cigarettes. A recession may even make this a better buy because people will maintain their small pleasures (coffee and cigs) but put off buying a new JetSki.

I've been watching SBUX all the way down hoping to get it somewhere in the 16-18 range. No position yet, but soon. This is a phenomenal long-term investment.

One last pro is that Schultz is back. While there haven't been any earthshaking announcements, just the fact that a retired billionaire was so compelled/unsatisfied with his former baby that he needed to come back is the type of management I love to see in a company I own.

Anyway, just my $.02
No position (yet).

[delcape]

Once again, I'll say that my money's on Howard. - Read the bio. This guy WILL bring his baby back. To repeat; when SBUX hit 37, I took money off the table, ALL that I ever put in, and then some. That left me with hundreds more shares, because I bought it all the way up, and owned it while it split 2/1 three times. Yes, it's a long view, but, they continue to open 4-5 stores a day worldwide. As the new globalization phenom. grows, so will Starbucks. - Don't look for a qick return, buy it for your IRA. or your kids college fund. I believe in it wholeheartedly.

[delcape]

P.S. - Disclosure; I don't drink SBUX coffee. "The Coffee Fool" has a better line, and is a better dollar-value. For ROI it's SBUX..... be of good faith.

[fredsbdo]

interesting article,but I can not agree with it.I too do not see Sbux customers going to MCD for a cheaper coffee drink,that's ridiculous and dunkin donuts a competitor? NO Way, the donut crowd is much different.
What can sbux do?terminating all of those top heavy management positions was a good move.Getting rid of the breakfast sandwiches was a good move.The managers that I have interviewed all tell me that they throw out about 25 % of the sandwiches because they can't sell them before the exp date.This was one of their poorly planned endevors.They have no freezers so they get their sandwiches premade and refridgerated and must sell in two days.The only time of day to sell them is in the morning.....then the investment of the ovens ,promo material,training.I think that they should stay with what they are successful and that is beverages and that is where the profit is.
Speaking of profit,besides the money that they lost on the breakfst fiasco,the price of milk has gone up about 50% in the last 2 years,since has come down a little the last two months.The soy milk has done pretty much the same. Coffee,chocolate,and all of their packaging has gone up by about 15% in the last year.Wages have gone up about 10%. Leases on the new locations in prime areas are double what they were 5 years ago.These are their challenges.The customers continue to come in,I do not know what their customer counts are but when I go to sbux I continue to stand in line just as I have done for the last several years.
I see that their profit margin has shrunk considerably and since they make less per customer,they need more customers for more profit.They cannot raise their prices anymore at this time.I think that most stores are maxed out on handling more customers and I think that the only growth is new stores and the international arena will help them greatly.
When the commodity markets finish their run and the markets consolodate,and milk,coffee,and soy milk come down in price,that will contribute to the bottom line as will the fact that they will not be paying for breakfast sandwiches and wraps that they just throw out.Perhaps,the stores can handle more business in the morning if the baristas and the cashiers are not warming and wraping the sandwiches that they are not throwing out.
I am a shareholder in SBUX and MCD.I think that this is an excellent time to buy shares of SBUX.I say that SBUX is the leader in their industry and they will continue to lead.I continue to buy shares of both SBUX and MCD.I say that they will meet the challenge of rising prices ,competition,and operations.I also say that they have a solid customer base and that SBUX will just have to figure out how to make the most profit from these customers.