Starbucks Plans Have Potential

Based on news reports, Starbucks may just finally be seeing reality. Starbucks (SBUX) reported net income for the second quarter of $108.7 million or $0.15 per share, compared to $150.8 million or $0.19 per share for the year-ago quarter or $208.1 million or $0.28 per share. Operating income for the second quarter fell 26% to $178.2 million or 7.1% of revenue from to $241.0 million or 10.7% of revenue in the prior year. Decreased consumer traffic resulted in a mid-single-digit decline in U.S. same-store sales. (Call Transcript)

Most of us knew this was coming no matter how long management denied it both to themselves and to the public. The question is, "what are you going to do about it"? For a while I have been saying an axe needed to be taken to expansion plans. It seems management may finally be acquiescing.

Management lowered U.S. store opening targets for fiscal 2008 to about 1,020 net new stores from its previously lowered target of 1,175. International store openings are expected to remain as previously announced at 975 stores. The company still expects capital expenditures for fiscal year 2008 to be about $1.1 billion.

Here is the good part. Starbucks then said it plans to open significantly fewer new stores in the U.S. over the 2009 to 2011 period, less than 400 net new stores per year. However, it plans to continue to accelerate the International unit expansion, targeting net new store openings of 1,050 in 2009, 1,150 in 2010, and 1,300 in 2011. Total store count will be about 21,500 stores by the end of fiscal 2011, with its international presence growing from about 30% to over 40%.

This, in conjunction with the new drinks planned are steps in the right direction, if executed properly. Does it mean shares are a buy? No. If the new drinks are $5 a pop they will flop and more pain is in store. If the economy stays flat and Starbucks rigidly sticks to US expansion and pricing plans, more negative stores comps are coming.

At least the company is acknowledging the need to change. But, acknowledging it and actually executing it properly are two very different things. Based on the past year, proof is needed before investing.

If Schultz wants to be the high priced alternative in the market, fine, just do not promise investors 18% EPS growth in the current environment. It gives people the impression that either you do not know what is going on out there or are lying. Neither is a good one.

Disclosure: No position

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