Friday, November 6, 2009

Is it time to take a sip of Starbucks stock?

By Money Matters Editors


Starbucks (SBUX) posted a decent Q4 EPS result of 20 cents, compared to the First Call EPS estimate of 21 cents per share, or 24 cents excluding restructuring charges, but were the results good enough to warrant a Buy rating? In other words, is it appropriate for investors to resume taking a sip of that Starbucks’ ‘stock coffee?’

Starbucks’ Q4 revenue declined 4 percent to $2.42 billion compared to the First Call EPS estimate of $2.39 billion. For FY2009, SBUX earned 80 cents compared to the First Call estimate of 76 cents. The performance will likely please most institutional investors (IIs), who may bid-up the Starbucks’ shares on Friday.



Still, Money Matters is taking a guarded stance toward SBUX. The Seattle-based upscale coffee chain has closed hundreds of stores, and introduced an instant coffee (once viewed as heresy), but more actions are needed. Here’s why:

Starbucks same store sales fell 1% in Q4. Further, the ‘frugal consumer’ trend in the United States is not going away any time soon, and Starbucks needs to re-align its products with the new, budget-conscious U.S. citizen. Under current economic conditions, there aren’t nearly enough consumers to support a $3 latte, let alone a $3.50 or $4 latte. When Starbucks finds a way to make money from a $2 latte, Money Matters will be bullish on that menu item.

Second, Starbucks ended the current fiscal year with 11,128 stores in the U.S., 5,507 internationally; it closed a net 439 U.S. stores, and opened a net 394 abroad. That’s not a sufficient shift. It doesn’t take a rocket scientist to observe that Starbucks has too many stores in numerous, key U.S. metro areas. In the New York City metro region, it seems you can’t go more than 4 miles without running into a Starbucks. In FY2010, SBUX plans to open 100 new stores in the U.S. and open 200 in international markets. Given the dearth of consumers with adequate disposable income, a good tack for Starbucks would be to concentrate new store openings in nations that have the best prospects for sustainable GDP growth with expanding middle classes. A better tack: close even more marginally-performing U.S. stores than the current plan calls for, and shift those resources abroad.

When Starbucks returns to same store sales growth in the 3-5 percent range, then Money Matters will be bullish on the stock. For now, the rating is Don’t Buy.


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Disclosure: Money Matters Editors and staff do not own shares in stocks they review.

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