Starbucks Gets Re-Caffeinated - Barron's

Starbucks (SBUX), credited with brewing up a coffee-culture revolution, has seen its share price fall as costs have risen, tough economic times have pushed down demand and various food chains have introduced rival premium-coffee offerings. Still, Barron's says Starbucks may yet provide the share price jolt investors are waiting for.

CEO Howard Schultz says the company is working to "significantly differentiate" itself from the copycats that have sprung up, as chains like Dunkin' Donuts and McDonald's chip away at Starbucks' market share with their own lines of premium coffee drinks. Schultz is responding to customer requests for an expanded menu including healthier foods. Since 75% of Starbucks' revenue comes from beverages, any increase in food purchases could significantly help revenue. After years of rapid expansion, Starbucks is cutting 600 store locations and pushing down costs in the U.S., which is estimated to add $0.17-0.18 to earnings per share, while simultaneously expanding abroad. Seventy percent of Starbucks' overseas revenue comes from the U.K. and Canada. Both those countries are facing housing market woes, and Starbucks is looking to expand in China, Russia and Latin America. Starbucks is also targeting existing customers by rolling out a new Starbucks card program and introducing new in-store promotions.

With Starbucks' renewed commitment to innovation and smart growth, an uptick in consumer spending a year from now could send the company's shares up as much as 20-30%. Some analysts estimate the next three years could push the stock price up as much as 50%.

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• Starbucks (SBUX): FQ3 EPS of $0.16 misses by $0.02. Revenue of $2.57B (+9%) vs. $2.61B. Sees full-year EPS of mid-$0.70s vs. $0.81. [PR]
• Bucking the retail trend of bringing in Christmas early, Starbucks is launching its holiday season after Thanksgiving. Some retailers worry that a later holiday launch will dampen already-weak consumer spending, but Starbucks is betting that coffee-drinkers will fall into "holiday fatigue" if the tinsel is brought out too early.

Comments

[H-Bomb:]

I would love to buy you a latte

2008 Sep 28 10:47 AM

[willyboy:]

A lot of stocks are beginning to look very cheap. Hope this holds up for another 6 months. XMSIRRIUS is looking like a good buy also. I am in.

2008 Sep 28 10:57 AM

[sundrenched:]

I'm not convinced. This stock is a textbook example of people overpaying for growth. With a PE over 24, it's not exactly cheap. And it looks like Americans and the British (large market for SBUX) are going to have to get used to living more frugally than they've done in the past 20 years.

2008 Sep 28 12:02 PM

[Dividends A...:]

I agree with Sundrenched. This stock didn't even hit any resistance on the way down to $15 because it doesn't pay a significant dividend, expanded way too quickly away and didn't compete effectively against its competition. A $2 coffee is one thing, a $7 latte is another.

2008 Sep 28 02:03 PM

[Rafael Grillo:]

We will have to see what the specific turnaround strategy is. However, I still believe that Starbucks responds to very fundamental pleasure needs of a new generation of consumers. Indulgence will not go away for them. More importantly, this quest for fulfillment and deeper satsifaction is global. I've stated repeatedly that SBUX real opportunity for growth is overseas. I am glad to see that addressed in Schultz turnaround strategy. I believe we will se SBUX in the upper 20's again.

2008 Sep 28 09:04 PM

[User 218471:]

Don't believe it. I have held Starbucks through the 2008 debacle and despite the fact that they are cheap, they are going to start losing more and more ground as a flight to discount continues. As the economy declines, less and less people want to buy a $5 cup of joe when McDonalds makes a great cup for a buck. This one wont turn around in a day, though three years is more than possible with Schultz at the helm.

Be prepared for a long struggle for 20-30% upside in the face of $10 short-term price targets.

2008 Sep 28 10:45 PM

[Crayon G.:]

SBUX is a terrible stock to own hoping for a pop. Howard Schultz is, in many ways, just like Jerry Yang. He fatally believes that his baby is "sacred and special" and highly valued in an environment that punishes this belief. His "corporate retraining to make a good cup of joe" campaign when he returned was nothing but transparent window dressing, and his "buy an expensive coffee in the morning, get an iced coffee for 2 dollars in the afternoon in exchange for the receipt" smacked of desperation and unwillingness to accept price cuts. Before you go pumping SBUX, take a look at Schultz vs. Yang, and see where the latter ended up.

2008 Sep 28 11:51 PM

[gksmar:]

This company is still making a lot of money. Its expanding overseas, the growth is much bigger in the emerging markets for decades to come (unless there are no stupid wars) . People are talking like the world is coming to an end. Markets will always recover and people will always spend.

2008 Sep 29 12:05 AM

[Itsonlymoney:]

@Bullish Banker, fyi coffee at Starbucks is $1.35+/- not $5.00. Will SBUX rise again? Who knows but McDonalds is not their competition.

2008 Oct 01 02:57 PM

[bigdog1:]

MY advise; get rid of the cd's and movie tie ups with PC implications, dump the NY Times paper(which no body buys outside of NY). Healthy eats are good but as of now their food has no taste. Oh, and buy the way start selling coffee!!!!

2008 Oct 05 10:02 AM