In a brilliant article in The New York Times, the paper points out that of all the mistakes that Starbucks Corp. (NASDAQ: SBUX) made in its expansion, picking real estate locations may have been the worst. Much of the analysis for the piece came from talking to real estate brokers. The paper writes, "In some cases, brokers say, Starbucks misjudged the risks of putting stores close to each other, leading to the decline in same-store sales."
It is astonishing that Starbucks would make such basic errors and speaks to what happened to management during the period when founder Howard Schultz was absent from the CEO job. The team that replaced him said it believed the company would eventually have 40,000 store worldwide. It clearly cut corners in terms of planning to get there.
The real trouble with the real estate location decisions is that it may take a very long time to fix. Closing stores may be easy, but finding better spots, negotiated for the space, and building out new stores will be time consuming and, perhaps, expensive.
Schultz and his minions are paying for rampant growth, and the poor souls who worked for him are paying more. Almost 12,000 will lose their jobs.
Douglas A. McIntyre is an editor at 247wallst.com.
I'll admit the headline is a bit deceptive. On one hand McDonald's (NYSE: MCD) has seen a resurgence in its business and frankly, the shares have done very well. In fact since McDonald's went through its own set of problems five years ago, the stock has since tripled in value.
The parallels between Starbucks (NASDAQ: SBUX) and McDonald's are very eerie. Starbucks has hit the proverbial wall after a successful ride from 1992 to 2007 as one of the premier GameChanger stocks around. Starbucks, like McDonald's over-expanded its store base in the United States and began to cannibalize its own revenues. Starbucks, like McDonald's, lost its principle focus and did not tend to 'what got them there".
In late 2002 McDonald's stock had just finished a 4 year run of losing 70% of its value. The company was becoming a hodgepodge of different menu items, culminating with the disastrous release of the McLean Deluxe, which was not even all beef! Advertising and marketing programs were a mish-mash of geographical themes yielding no consistency whatsoever. McDonald's even posted, for the first time in its illustrious history, an operating loss in 2002, and experienced negative same store sales for the first time, as well.
Then CEO Jim Cantalupo said enough was enough. McDonald's closed 700 unproductive stores (sound familiar?) and re-focused its menu and advertising campaign.
Starbucks (NASDAQ: SBUX) indicated plans to close 600 unprofitable domestic stores and incur pre-tax charges of $328-$348 million, including asset write-downs of $200 million.
Deutsche Bank says: "With US consumers still reeling and McDonalds (NYSE: MCD) on the cusp of a nationwide specialty coffee rollout, it is too early to call a bottom on fundamentals – maintain Hold."
SBUX July option implied volatility of 42 is near its 26-week average of 39 according to Track Data, suggesting non-directional price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
I hemmed and hawed when I saw Jennifer Openshaw's piece on MarketWatch a few weeks ago; her opinion was that Starbucks (NASDAQ: SBUX) would recover much of its lost value in these past several months of sluggish sales, rising milk costs and slipping coolness, no matter what the naysayers, say. Her argument: that Starbucks was great because of its atmosphere and general quality standards in coffee. While I certainly agree that Starbucks is still an attractive "third place" and would pick Pike Place brew every time over McDonald's or Dunkin Donuts coffee, I hesitated. Had management already made too many mis-steps? Had hubris got the best of the 'Bucks?
The latest news; that Starbucks management has plans to close 600 stores in the U.S. this year; could be an indication of positive things in the company's stock price. It certainly had traders in after-hours activity eagerly snapping up shares, sending 72 cents, or 4.6%, to $16.34 around 2 a.m. I'm always leery, though, of a huge strategy reversal such as this. In my analysis of Starbucks' financial statements, the company spends about $300,000 to start a new store, and this is largely funded through cash. Management regularly offers old furniture and equipment to its high-ranking employees when upgrading or shutting down a store, so it's unlikely that much of the cost will be recouped. Doug McIntyre noted further that Starbucks will continue to pay more millions in lease costs; the company is known for locking up prime real estate with serious long-term lease agreements. Sure, the loss won't affect the cash balance much, and the charge will be "one-time," so the financial picture will still look rosy in a year when the charge has dropped into "historical financial statements." Investors don't look back.
But by acknowledging that some $180 million in costs, not to mention the hundreds of millions probably spent to train and employ staff at these locations, was a big waste of money, Starbucks management is owning up to a future of slow growth.
MSNBC reports that Starbucks (NASDAQ: SBUX) is closing 600 stores. The closings could eliminate as many as 12,000 jobs -- this is 7 percent of Starbucks' global workforce.
The move isn't that surprising given Starbucks' recent weaker-than-hoped sales. But, still, it is a big change from its famous strategy of opening stores lots of stores, many in close proximity to each other. "Starbucks, known for sometimes going so far as to open stores across the street from one another, has recently acknowledged that it may have lost some of its luster during a long period of rapid store openings and expansion into everything from breakfast sandwiches to movie promotions," writes senior writer Allison Linn.
Starbucks will take an after tax write-down of between $328 million and $348 million related to the store closings. But because of tax benefits, it expects to see total cash outflow of about $100 million. Starbucks stock is up 6.5% in after hours trading.
I almost can't believe that I'm writing about this, but I guess some prudes will get up in arms about anything.
BBC News reports that a U.S. based Christian group known as The Resistance is calling for a nationwide boycott of the coffee selling giant, Starbucks Corp. (NASDAQ: SBUX). The group's complaint against the company stems from the commemorative use of a toned-down version of the company's original logo. Starbucks states that the logo, which features a dual-tailed mermaid sporting cleavage, is not inappropriate. The fringe Christian group refers to the logo as a naked woman with legs "spread like a prostitute."
The news report from BBC states: "Howard Schultz, who bought Starbucks in 1982, described the emblem in his memoirs as "bare-breasted and Rubenesque; [it] was supposed to be as seductive as coffee itself."
To look at the logo that is claimed to offend, one has a difficult time even seeing it as raunchy. To call the flared dual tails a pair of spread legs might be a feat best accomplished while on serious hallucinogens. Clearly, this group of well-meaning Christians is at a loss for real issues to attack. The fringe group's lack of imagination in seeking some media exposure for itself is seen by me as a shallow act of spotlight grabbing.
Starbucks is reported by the BBC as stating that the bare breasted mermaid will appear on some of its cups for several weeks as part of a company promotion. It was not revealed which of Starbucks' 16,000 coffee shops in 44 countries will be featuring the racy mermaid cups. However, I'm sure that anyone who is interested in getting one of these alleged soft-porn coffee cups may rest assured that, before too long, they'll be available to anyone via eBay.
Tim Hortons (NYSE: THI) can't seem to get enough of bad PR lately.
Only two weeks ago Canada was in an uproar when Tim Hortons fired a single mother employee from a London, Ontario location because she gave a child a free Timbit (a doughnut center). Tim Hortons has since rehired the woman.
Then, on Wednesday, Teresa Lee, a Good Samaritan who happens to be a Toronto investment manager, bought breakfast for a pregnant homeless woman. When she was about to leave and go to her job, an employee admonished her, saying the homeless woman cannot stay to eat the purchased breakfast in the restaurant. According to the employee, "Tim Hortons at King and Victoria Sts. does not let homeless people eat inside, even if they are eating Tim Hortons food, because they 'make a mess.'"
Well, the chain claims it has no policy on the treatment of the homeless. Since 95% of the Tim Hortons stores in Canada are independent franchises, it is up to franchises to "make delicate judgment decisions when dealing with any disruptive customers to ensure the store is pleasant, comfortable and safe." Tim Hortons has apologized to Lee, the investment manager, but failed to apologize to the homeless woman.
It's quite surprising to see Tim Hortons, which has been called "a Canadian icon of best practices from a franchising perspective," getting it so wrong lately. Tim Hortons is a Canadian icon, not just from business perspective, but from a cultural one too.
If there was one thing Tim Hortons definitely didn't need to learn from Starbucks (NASDAQ: SBUX), it was this. Starbucks had a few incidents involving homeless and bad PR itself. Tim Hortons has hurt its brand image with this negative publicity. So while indeed it comes down more often than not to judgment calls, those calls have been wrong of late. Perhaps Timmies should have a specific company policy on the treatment of the homeless after all.
Shares of Starbucks (NASDAQ: SBUX) were up more than 6% on Friday after Nelson Peltz disclosed a stake of less than 1% in the company.
The Wall Street Journal reports (subscription required) that "John Glass, an analyst at Morgan Stanley, said Mr. Peltz could urge Starbucks to cut spending and use more licensing or franchising in opening locations. The money saved from that could go to buying back shares or a larger dividend for shareholders."
Perhaps. He very well could urge Starbucks to do that -- but take a quick look at the chart for the company that Mr. Peltz is chairman of -- Triarc (NYSE: TRY). The stock closed at $6.69 on Friday, after beginning 2007 at more than $20 per share. And how's the corporate governance over there? One company that engaged in a proxy fight with him blasted him with this:
Triarc received a corporate governance rating of 21.5, exceeding only 21.5% of all companies in the S&P SmallCap 600 and ranking it in the bottom quartile. Separately, Corporate Library gave Triarc an 'F' on overall board effectiveness -- the lowest possible rating.
Most likely Peltz's stake is a nonissue and will lead to no changes. I certainly don't buy that it's a rational reason for the stock to add more than half a billion dollars to its market cap in a single day.
Shortly after the market closed today, Starbucks released its fiscal second quarter earnings figures, and the company posted earnings for the quarter of 15 cents per share, which was in line with analyst estimates. The company reported that its second quarter profit numbers were down 28% year-over-year, as the company continued to struggle in the current financial environment.
The income figures were definitely nothing to cheer about. During its second quarter last year, the company had net income of $150.8 million, but that number was slashed this quarter, as the beloved coffee chain was only able to come through with $108.7 million. Revenues actually were higher this year, rising 12% in the quarter on a year over year basis, still they came in slightly below expectations. Analysts had been hoping to see revenues of $2.55 billion, while the actual number was a bit shy of this, at $2.5 billion.
This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and check out other Battle of the Brands posts.
Oh, how the sugary have fallen. Ten years ago, even five, you and I both know how this would have come out. In the standoff between longtime national fried-dough pusher Dunkin' Donuts and upstart sweet freak Krispy Kreme Doughnuts (NYSE: KKD), Krispy reigned supreme. The chain was rolling out new franchises as fast as dough circles could parade around its restaurants on shiny metal racks, and each time it did local police stations did overtime directing traffic.
Somehow, the mighty fell after the considerable sugar high, largely connected to poorly-managed finances, badly-handled expansion, and a sudden national fear of carbohydrates. All the while, Dunkin' Donut managers everywhere continued to plod along, making the doughnuts, and quietly stirring a blue-collar breakfast revolution. One day America woke up and realized, hey, Dunkin' Donuts' coffee is good! Someone named it "Better than Starbucks" and it soon became clear that the product guys had realized something: we make a lotta money off of coffee. Actually, more than half of the company's revenue.
Starbucks (NASDAQ: SBUX) plans to come out with new premium drinks this summer. One will be a fruit smoothie and another a sugar-based drink created by a company in Italy. According toThe Wall Street Journal, "Starbucks says they're the first stage of a broader push into healthier drink and food offerings."
The new products are not likely to help the coffee retailer much. Smoothies and Italian ice drinks are available at a large number of shops, even Baskin Robbins. Starbucks does nothing to differentiate itself by coming to market with products that are easy to come by elsewhere. It is also a move away from its core coffee franchise.
The other issue with the new drinks is that Starbucks stores already sell scores of items. When custom ingredients are put together with the regular drink menu, most stores offer dozens of drinks. The stores also sell ground coffee and coffee makers. Add to that donuts, muffins and other food. Starbucks will also sell anyone who comes through the door music and DVDs.
Tomorrow afternoon, Starbucks (NASDAQ: SBUX) will be joining the earnings parade when it reports its second quarter numbers.
The last time that the company reported earnings was on January 30, when the company beat analyst expectations by a penny, posting 29 cents a share. But that was still not enough to get buyers enthusiastic about the stock.
Shares have fallen around 13% since then. This time around, analysts are looking for the company to show earnings of 15 cents a share.
Starbucks Corporation (NASDAQ: SBUX) was reported last week to be "pulling back" from the company's one year old record label, Hear Music. The label, which released high profile and chart successes from Paul McCartney and Joni Mitchell, will be turned over to independent label Concord Music Group. Concord will also assume management and promotion for those artists that signed with Hear Music, including McCartney and Mitchell, as well as James Taylor and newcomer Hilary McRae.
In the meantime, Ken Lombard has left the music label and coffee giant "to pursue other business interests" according to MSN. Chris Bruzzo, who had been the chief technology officer, has been promoted to the leadership role in the Entertainment division at Starbucks. According to Billboard, Lombard's exit and the reorganization of Hear Music "are part of a strategic overhaul to examine all aspects of its business that are not directly related to its core."
Over a year ago, when the announcement was first made that Starbucks would be starting a music label and had successfully signed one of The Beatles as its first artist, it made headline news. Given the success that McCartney has seen with his only album for Starbucks and the way the marketing for the album was handled, the news that the label is essentially moving back into the industry is shocking. Even though Concord is an independent label, the exciting thing about Starbucks' music label was that it was so different.
It may not have been any cheaper to buy the album from a Starbucks store, but it was the method with which it had approached selling music that was special. It was inventive and really showcased the full extent of each product. Fortunately, it is doubtful that Starbucks will stop stocking CDs or even Hear Music albums. Perhaps it was just too late for a physical album label to be set up successfully due to the success and promotion that digital music has started to enjoy within the same time period.
I'll admit the headline is a bit deceptive. On one hand
Starbucks
I hemmed and hawed when I saw 
I almost can't believe that I'm writing about this, but I guess some prudes will get up in arms about anything.
Here are some highlights from this past week's 
As I discussed in my 
This post is part of our 
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
Starbucks: The next McDonald's
