Has Starbucks Bottomed? Not by a Long Shot

16 months ago I said in a post comparing McDonald's (MCD) and Starbucks (SBUX):

 

Of course there are the "coffee connoisseurs," they will never go to McDonald's and I am not talking about them, I am speaking of the great ambivalent masses in the middle. When all things are equal, price and convenience always win.

 

Listen to the CEO of Dunkin Brands comments on Monday morning.

Starbucks likes to think of itself as the "Tiffany's" (TIF) of coffee. Okay, I'll go with it. Here is the issue. Tiffany's does not have 14,000 locations. You cannot be the high priced option in a commodity business and have that many locations and survive a downturn without being severely bruised and battered.

Starbucks is responding by closing 600 locations. Mark my words here....there will be more. Dunkin is getting the trade down business and even its CEO sounded cautious. If I were a Starbucks shareholder, based on this interview, July 29th would be a very nervous day for me. Q3 earnings come out and I would be highly shocked if Starbucks managed to come close to the 15 cents (down from 19 last year) analysts expect without some nifty tricks.

In what seems an eternity ago when shares sat at $37, I said they were due for a fall. When they got to $25 I said they were due for more downside and said the same at $21. Now at $14 and change, a price not seen since Sept. 2003, have they bottomed? Not by a long shot. Starbucks still trades at 17 times this year's expected earnings. (That expectation, I think is too high, in which case the earnings multiple is actually larger).

Starbucks is going to struggle for the next year or two because other than closing a few locations, it has not made any fundamental changes that will make it more appealing to cash strapped customers. Unless it finds a way to enable customers to feel a value proposition from going there, store traffic will continue to decline.

By the time it is all over, we ought to see shares trading at $10 each.


Disclosure: Long MCD

Comments

[billddrummer]

In my region (Northern NV) many of the SBUX stores are curtailing their hours, typically closing an hour earlier than before. If that program extends to the entire chain, the company could save as much as $168 million a year just on labor. (Figure 3 employees/location @$11/hour x 363 days/year x 14,000 locations.) A small thing, but a significant savings.

Fundamental changes are still needed, but I think the company is at least attempting to narrow its focus and become more efficient. 600 store closings isn't that significant in savings, because the lease termination costs will eat up any perceived savings the first year. Slowing the pace of opening new stores seems a better strategy to me.

[gokou3]

Reducing opening hours is not a focusing/efficiency strategy; it's a cut-loss. If you think in terms of net income per employee, wouldn't this mean further profit erosion?

[User 227229]

It's about time this predatory monster experiences what they did to so many family owned businesses. The lower it goes, the better it gets. No love lost for Starbucks as it was never there.

[billddrummer]

To gokou3:

It's reasonable to think that it's a cut-loss strategy, but however you define it, the net result is lower costs.

Now, I'm not saying that cutting hours at all locations makes sense. For example, there are Starbucks in Las Vegas that are open 24/7, and for those locations, cutting back hours would truly hurt business. But for most neighborhood locations I'm familiar with, the sales revenue generated during the final hour isn't sufficient to pay the staffing necessary to keep the store open.

I think the company will need to look at every avenue to restore growth.

[2houndz]

Predatory Monster? Overdramatic blooger?

[mtcook]

As a former Restaurant manager that last hour is very important to getting the location ready to close. Cleaning, restocking, etc. is being done. The time you close has a lot do affect on the two hours before the door gets locked. -2 hrs customer tarffic slows employees regroup for preclose. -1 hr cleaning and restocking like I said before. 0 hr lock the doors clean all the stuff that you cant do with people in the location. If you where to close even 1 hour eariler you would be moving into the tail end of the peak business hours, with employees wanting to get out and hour early they start pre-closeing, and ignore the customers. Its kills business in the long run, you loose money by trying to save a few bucks.
We did the same thing in the Restaurant that I worked in. They wanted us to close at 10 instead of 11 Sun-Thurs. I told my DM that I would not close early, after a big fight he let me be a test store. While my labor stayed about the same and the other stores labor dropped my sales stayed the same and the other stores SALES dropped. All business is opperated to MAKE money not save it. When you start running a business to save money,and not make more money, run dont walk away from it.

[pabs]

here is a true tale, i own a a business district cafe and eatery in stamford ct, cafecaroline.com i jumped through hoops to sell starbucks presuming the cache would be great for our business clientele and great for delivery

starbucks promised me they would not let others very local to me sell starbucks, well that lasted 2 months and they started selling starbucks at one of the office building cafeteria's local to us, curtailing any thoughts of starbucks delivery

we ran with it for about 6months paying a hefty materials premium not only for the coffee but for the paper cups etc after that term my partner and i began to wonder if starbucks brand was actually bringing in additional customers and with limited data (1 store ) we concluded 'no'

so what did we do ? well my partner carolines scoured the land for the best tasting coffee, we rebranded everything to cafe caroline 'MoJo' brand and put it out there and the reaction was...

absolutely NOTHING ! the odd comment here and there people were totall satisfied, our sales go up everymonth about 9-12% because we are new however not factoring this in we do not appear to have any decline is sales whatsoever
we do however save a staggering 61% on the cost of materials