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Street Expectations for Starbucks (SBUX) Are Very Low, Despite Recent Initiatives -Barron's
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An article published in this weekend's edition of Barron's touts shares of Starbucks (Nasdaq: SBUX), which are down nearly 30% year-to-date and down more than 40% over the last year. The article points out several interesting reasons why something could be brewing at Starbucks.
While food-service companies such as McDonald's (NYSE: MCD) and Dunkin' Donuts have recently stole market share from Starbucks by bringing coffee products to mainstream customers, Starbucks CEO, Howard Schultz, believes that customers will soon start to trade up to Starbuck's more distinguished coffee flavors. With beverage sales accounting for about 75% of Starbucks' sales, the CEO also believes that healthier breakfast options will create a huge opportunity within the food segment for the classically beverage-oriented restaurant.
The article also points out that Starbucks has several ideas in its pipeline that will create more value for consumers. The company is currently working on such promotions as prepaid cards with certain perks, and a surprise card program which CEO, Schultz feels will be a "surprise and delight" for customers. Starbucks also recently has been offering free in-store WiFi to preferred customers. The company is currently estimating that its new ideas and promotions could raise same-store sales growth into the mid-single digits, while simultaneously cutting costs.
Also adding to the cost cutting effort, Starbucks announced a massive plan to close about 600 stores recently, consequently cutting about 1,000 non-store jobs. Starbucks estimates that the initiative will save up to $200-$210 million per year, effectively adding $0.17-$0.18 per share to earnings. Moreover, the company has said that about 70% of its store closings are within 3 miles of another Starbucks, meaning that the remaining retail outlets will likely see increased traffic.
The article concludes by noting Starbucks' Annual Leadership conference will be held at the end of October, at which time management will unveil to employees its initiatives for this year's holiday season and next year. With expectations very low, Barron's hints at the fact that if analyst's are surprised, the stock could be jumping substantially higher.
Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide.
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Starbucks - Expectations
David on Sep 29, 2008 01:22 PMThe Barron's article seems to be optimistic in its conclusions. Lets look at some realities. 1. Little evidence of customer calls for healthy food choices at Starbucks. The health food kick the company is embarking on is driven by Shultz and one of his fledgling venture capital investments that created the menus for the new food products. 2. Some of the store closures are still costing money as leases are still having to be paid for at some locations until final exit costs can be resolved with property owners. 3. With increasing concerns over the drive by some areas to unionize, notably the Twin Cities and NY areas, what does this say about staff morale and Starbucks labor practices. History shows that contented / valued employees don't seek union protection or collective bargaining power. Poor pay or as is common in Starbucks, insufficient hours to generate a living wage are major contributors to unionization. Add to this poor skills at store manager level and district manager level, then core employees feel often that they have little choice but to seek external help. 4. The upcoming conference will be interesting. Will store managers leave fired up to motivate their teams, or leave further demoralized by unrealistic targets and further costs being heaped upon their store budgets? How much listening do the senior people really do at these events to the concerns of employees? How many store managers feel they can speak-up openly and freely without fear of loosing their jobs? Its often been written that Shultz does not take kindly to criticism (offends his ego), but more rational folks accept feedback as a gift, an opportunity to learn, understand and create from. But, we'll have to wait and see once the conference is over what outcomes there are. We've seen a significant about face from Shultz over hot food, protestations over getting back to "the Starbucks roots" but no real evidence of that happening, so where is Starbucks going?