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Starbucks' Schultz needs to get on the ball

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May 04, 2007

Starbucks' Schultz needs to get on the ball

Aaron Pressman

It was a fascinating day for coffee yesterday after the market closed -- not so much for drinkers as for investors. Big Kahuna Stabucks (Symbol:SBUX) reported first quarter results that, on first blush, looked robust with profit up 18%. But deeper down, the troubles continue despite chairman founder Howard Schultz's February memo seeking to get the company back on track. Schultz has been on a reassurance tour since admitting in his leaked Valentine's Day missive that the company had lost its passion and competitors were beating Starbucks at its own game. Shareholders aren't buying the reassurance after yesterday's report. Shares are down 3% today, 7% since the memo became public and 21% over the past year.

While Howard's been reassuring, the company hasn't made a move or even announced a move to get back to its roots. What happened in the latest quarter? Starbucks said it made 19 cents a share, or $151 million, in its fiscal second quarter versus 16 cents, or $127 million, a year ago. Revenue increased to $2.3 billion from $1.9 billion. So on an almost $400 million revenue increase, Starbuck's profits increased a measly $24 million. Sales at stores open at least a year rose 4% worldwide, 3% in the United States. In other words, growth keeps slowing as competitors like McDonald's (MCD), which reported same store sales up 8% in its first quarter, keep upping the pressure.

Other troubling data points came from elsewhere in the specialty coffee world yesterday. Peet's Coffee & Tea (PEET) reported a 37% drop in first quarter profit. The shares have lost 2% today. Green Mountain Coffee Roasters (GMCR) reported net income up 50% but its shares are also down 2% today. Profits rose thanks in part to an acquisition.

The pressure is only increasing. McDonald's said a few days ago it was extending its premium iced coffee menu to 700 restaurants in Chicago. Selling more and fancier coffee is one of the hamburger chain's top strategies. Don Thompson, president of McDonald's USA, told the Wall Street Journal this week: "We don't today have a lot of that market and so we're going after it fairly aggressively." With privately-held Dunkin Donuts on a big expansion kick as well, the coffee wars are getting tougher and tougher. Mister Schultz better do something beyond writing a memo -- and quick.

03:37 PM


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In an article posted on the CrossProfit site from 3/14/2007 we stated as follows;

"At present the markets are apparently in a valuation correction mode. Not that PE's are so terribly high - it's more like that future earnings are a major concern. Taking this into account the market is reacting to a possible earnings downgrade to some retail stocks in particular...

There are two factors at play. First and foremost, a general uncertainty regarding the well publicized U.S. economic slowdown. Bernanke recently reiterated this generally accepted phenomenon and labeled it a 'consumer slowdown'. Hence, retail stocks are taking a hit.

The second factor is consumer trends. Retail is notorious for changing direction over night...

The market has a tendency to overshoot in both directions. The U.S. slowdown will not be as severe as the market reaction renders which will result in investment opportunities. As for retail in general; markets have been pretty good in predicting imminent trend changes...

SBUX is classified in the leisure category and not retail. The idea is to point out that discretionary spending is going to take a hit during this part of the economic cycle. As previously disseminated, there are several types of discretionary spending. Though we are not talking about a recession, we will refer to this slow down as if it were one. Not all discretionary spending (DS) is recession sensitive. In fact some DS actually improves in a recession. There are three primary categories of DS..."

Disclosure: This is the opinion of a CrossProfit analyst and reflects the consesus at

Posted by: CrossProfit at May 5, 2007 09:40 AM

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