Thursday, July 3, 2008


There have been some bearish articles about Starbucks this week, after the company announced plans to close a total of 600 under-performing stores and lay off 12,000 workers (hopefully, the Starbucks I am sitting in now won't be one of the stores that gets closed). The company is certainly facing two negative macro trends: rising input costs (milk, coffee, etc.) due to the Ag boom, and the weakness of the U.S. consumer (due to what I call the four horsemen1 for short). Given those negative macro trends, I wouldn't buy SBUX here, trading at an enterprise value/estimated forward earnings multiple of nearly 18x.

That said, Starbucks management does seem to be making some smart course corrections to its business. In addition to the recently announced cutbacks in their over-saturated U.S. market, an article in the WSJ earlier this week ("New Brew Attracts Customers, Flak") indicates that the new Pike Place Roast has been successful in increasing sales of drip coffee in Starbucks stores by (if memory serves -- I read this in the dead tree edition earlier in the week) 5%-15%. Most of that WSJ article is behind a subscription wall, unfortunately, but the bottom line of it was that -- despite vocal protests by fans of bold coffee -- sales are up with the new brew. So it looks like this was a smart move.

Perhaps Starbucks will be worth considering as a potential investment in a couple of years, if most of the negative macro trend of U.S. consumer weakness is behind us then, and the company is trading at a lower EV/forward earnings multiple. Maybe the stock will be a buy then, when it's trading in the single digits.

1High debt levels, lower access to credit, high energy prices, and the negative wealth effects due to the real estate bust and the struggling stock market.

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