The Third Pig

Contents NOT Hot at Starbucks

Posted by Ben Taylor on April 25, 2008 10:10 AM

StarbucksThe shares of coffee maven Starbucks' (SBUX) took a 10% tumble Thursday after the company announced it was lowering earnings forecasts for the remainder of the year. Howard Schultz, the company's CEO, cited "...The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers." Schultz also mentioned the California and Florida markets, which make up 32% of domestic retail revenues have been especially impacted by the downturn in the housing market. Thus he/the company draws a connection between the struggles consumers are having in the housing market with a downturn in Starbucks' traffic in those states.

While I personally cannot be certain there isn't a direct connection between the housing crisis and lightened traffic at Starbucks's stores, I'm skeptical. If folks are making the choice between their daily java fix and making a mortgage payment, then times are worse than I thought. If there is any diminished traffic at Starbucks' stores it is more likely a result of internal missteps than outside economic forces.

An outside force I am convinced is not to blame for Starbucks' troubles is headwind created by the success of the coffee products from McDonald's or Dunkin' Donuts. Each of these companies does something well - McDonald's makes Egg McMuffins (delicious), Dunkin' makes, well donuts (also delicious) and Starbucks makes high-end specialty coffee. And the customers of each of these companies are as unique. McDonald's customers want a drive-thru window. Dunkin' Donuts' customers want sugar. And Starbucks customers want a place they can sit and enjoy a conversation, a newspaper or search the web. So I'm not troubled by competition. (Read my friend and fellow Starbucksian, Wayne E. Pollard's take on the subject at the Huffington Post.)

There were some encouraging words from the press release. Schultz committed to cutting costs and refocusing the company's efforts on making the best coffee in the world. Today, the company announced it was stepping back from its efforts in entertainment as well. If these actions reignite the company's growth, this period would have marked a prime and rare buying in opportunity.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Starbucks at the time of this writing.


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