Is Starbucks Getting a Caffeine Boost?

I've been doing a lot of thinking about Starbucks (SBUX) lately, and it's not because I'm a bit of a coffee addict, nor the fact that I've been getting less sleep than I'm used to.

I tend to ruminate about this company because of the significant loss of shareholder value that has plagued them since the beginning of 2007. In light of continued insult to injury (the stock is down almost 15% since 2008), I'm wondering if we're beginning to see a buying opportunity.

There's no doubt that an economic downturn will continue to take its toll on operations - Howard Schultz has admitted that the company is in for a tough 12 months (at minimum). But despite the decrease in spend attributable to specialty drinks, the company (based on proprietary research) has not seen meaningful levels of customer attrition. The mere fact that customers are just spending less on coffee drinks and not choosing McDonald's (MCD) or Dunkin' Donuts over Starbucks could imply the retention of a market dominant position despite our tumultuous economy.

This added to what appears to be a significant initiative to bring the company back to its roots (Schultz has just released an everyday brew dubbed "Pike Place Roast") whilst reaffirming the company's market dominant position, may be just the 'secret sauce' needed for the company to get back on track. For entirely too long, Starbucks has over-leveraged its scale by chasing pipe-dreams of disparate revenue sources -- the company and Howard Schultz appear to have acknowledged the importance of focusing on core competencies going forward. China, Asia, and Western Europe remain growth markets for the firm, and the Company is slated to open more international stores in 2009 than within the United States.

At a time where long ideas are few and far between, perhaps Starbucks' path to recovery gives us something to consider...

Disclosure: I do not hold a position with SBUX

Comments

[Karl Zachar]

I agree with Gilbert's positive sentiment on SBUX. Starbucks is still a terrific brand name with a loyal customer base. The question is: "Why buy NOW?" Over the past two years (SBUX peaked in May 2006), the stock has been on a downward trajectory. No one has made money with SBUX shares (except for shorts). I am not smart enough to pick the bottom. Sure, having a major management change can’t hurt. But the share price won’t turn until it becomes too cheap not to own. Right now it trades at EPS multiple of 18X ’08. EPS is growing at 14%. We might have to wait until Schultz gets those profits growing again.

Note: there may not be too many Starbucks in Montana, but in NYC, there one on literally every corner. Getting EPS growth back to 25% won’t be easy.

Karl Zachar
karlzachar.com

[billddrummer]

The only way EPS growth will get back to 25% is to aggressively expand into those economies that show the most promise--Europe and Asia. And don't be surprised if the bulk of earnings growth comes from the overseas markets.

[magman]

They stupidly filled in their moat of consistent high quality and upscale ambience which justified premium prices. It will take years to re-dig it, by which time McDonalds, and recession, will have removed much of their market. Turnaround? I don't think so.

[Starling]

Interesting about the growth in Europe and Asia. Actually, Asia (specifically china) has more starbucks then America, so overseas markets may not be the best way to expand.
And McDonalds taking starbucks customers? highly doubt that. Only moms with kids who are getting lunch on the road will go to McDonalds. Starbucks is too much of a staple. It is more about the happy feeling of "going to STarbucks". Most people (over the age of 12) don't get a happy feeling when talking about McDonalds. The customers, the core, are too into Starbucks to back off. And kids are growing up with starbucks every day for lunch. The stock will come back up, just not for a while.

[zimmyzee]

Charbucks has lost its cool. I expect the stock to trade down to an 11 p/e and short interest to substantially increase before a sustainable rally can take hold.

This is one of the lightest short sales of any stock. There is absolutely no skepticism.

Turnaround stocks don't bottom until the short interest skyrockets.

Enjoy!!