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Are Frappuccino Woes or Frugality To Blame for Starbucks's Stumble?
Summary: Following Starbucks Corp.'s Wednesday earnings release, the big question everyone is asking is whether sales were really lower due to a combination of longer Frappuccino production times and the abnormal July heat, or are consumers cutting down on trips to Starbucks due to higher gasoline expenses. The 4% same-store sales (for those stores open the last 13 months) increase Starbucks reported for July is its smallest increase in nearly five years. Gone are the days of 8-10% increases. Yesterday Starbucks shares were sold-off on high volume losing 8% on the day to close at $30.64. Starbucks executives tried to focus attention on the fact that the company plans to rollout at least 200 more new store openings than previously announced for its current fiscal year ending September 30th, bringing its yearly total to at least 2,000 new stores. Also mentioned was Starbucks plans to expand in India and Russia. Starbucks currently operates more than 11,000 stores world-wide with a goal of someday operating 30,000. Expansion however, might be just what is starting to pinch Starbucks with more U.S. locations in smaller towns, inner cities, and spots off the freeway. Its broadened customer base could be leaving Starbucks more exposed to consumers who do away with Starbucks when faced with rising gas prices and credit card bills. CIBC World Markets analyst John Glass commented, "We've been going through one of the most wrenching downturns we've seen in restaurant history. It is beginning to leach into a name like Starbucks, which has historically been immune to this." Chains such as Applebee's International Inc., Cheesecake Factory Inc. and Yum Brands Inc.'s KFC are blaming weaker sales on consumers cutting back for reasons such as higher gas prices. Starbucks CEO Jim Donald isn't blaming slowing sales on macroeconomic trends and instead calls Starbucks an "affordable luxury." Two other potential reasons for a slowdown at Starbucks are increased competition from McDonald's Corp., and Dunkin' Brands Inc.'s Dunkin' Donuts chain, and data that shows the number of morning coffee drinkers has declined for at least the last 15 years to 37.7% from 48.7% in 1990. Once again Starbucks executives try to refocus attention to the chain's rapid unit growth and strong earnings. Regarding the longer lines and labor-intensive Frappuccinos, Starbucks is implementing changes to speed up preparation time. CEO Jim Donald also argued that menu expansions are adding to sales, not detracting.
Comment on related stocks/ETFs: Investors have every reason to be concerned with a slowdown in sales at Starbucks (NASDAQ:SBUX). As CIBC analyst John Glass said, the restaurant industry is amidst one if its worst downturns in history. Blame it on the heat or higher gas prices, the fact is sales are slowing across the board. So what does this mean for McDonalds, which already operates more than 30,000 locations globally and is introducing upgraded coffee? It actually reported rather strong earnings on July 25th fueled by World Cup Soccer sales in Germany and the sale of Chipotle Mexican Grill (NYSE:CMG) shares. A Bloomberg.com article reports its same-store sales rose 4.2% in the U.S. in June, extending its streak of increases since April 2003 and notched even higher same-store sales marks globally. Rob Black reports in his Retail Stock Report from Monday that "McDonald's is not seeing signs of economic weakness or consumer skittishness in its U.S. business. He adds, "The underlying strength and growth of breakfast underscore the potential for coffee." Starbucks' smaller rival Peet's Coffee and Tea (NASDAQ:PEET) reported a 30.8% decrease in net profit yesterday causing its shares to also selloff, losing 6.26% in after-hours trading at $25.60 per share. Peet's sales did increase 19.1% on the quarter. Resources: Starbucks Q3 earnings conference call transcript, Mick Weinstein's posts on Starbucks Comments on Frappuccino Wait Times and its Ambitious Growth Plans, and McDonald's Q2 conference call transcript, and Peet's Coffee & Tea Q2 earnings press release.