16 months ago I said in a post comparing McDonald’s (MCD) and Starbucks (SBUX), “Of course there are the “coffee connoisseurs,” they will never go to McDonald’s and I am not talking about them, I am speaking of the great ambivalent masses in the middle. When all things are equal, price and convenience always win.”
Listen to the CEO of Dunkin Brands Monday morning:
Starbucks like to think of itself as the “Tiffany’s” (TIF) of coffee. Okay, I’ll go with it. Here is the issue. Tiffany’s does not have 14,000 locations. You cannot be the high priced option in a commodity business and have that many locations and survive a downturn without being severely bruised and battered.
Starbucks is responding by closing 600 location. Mark my words here….there will be more. Dunkin is getting the trade down business and even their CEO sounded cautious. If I were a Starbucks shareholder, based on this interview, July 29th would be a very nervous day for me. Q3 earnings come out and I would be highly shocked if Starbucks managed to come close to the 15 cents (down from 19 last year) analysts expect without some nifty tricks.
In what seems an eternity ago when shares sat at $37 I said they were due for a fall. When they got to $25 I said they were due for more downside and said the same at $21. Now at $14 and change, a price not seen since Sept. 2003, have they bottomed? Not by a long shot. Starbucks still trades at 17 times this year’s expected earnings. That expectation, I think is too high in which case the earnings multiple is actually larger).
Starbucks is going to struggle for the next year or two because other than closing a few locations, they have not made any fundamental changes that will make them more appealing to cash strapped customers. Unless they find a way to enable customers to feel a value proposition from going there, store trafic will continue to decline.
By the time it is all over, we ought to see shares trading at $10 each.
Disclosure (“none” means no position):Long MCD, None
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One reply on “From the Donut's Mouth: It's About Value”
I agree…..I watched some children the other day playing a game called Starbucks. They started beating and spitting on one child and said he was the hourly employee. I had the misfortune of working in their new roasting plant in SC for 2 months. It was horrible. No doubt the management there pulled the wings off butterflies when they were children so they could practice their superiority routines when they got older. It is insane to open this sweatshop when they have hundreds of thousands of pounds of unsold coffee on the shelves at their other plants.I won’t get started on the fake lanuage and lunacy about dignity and respect they try to peddle. One employee was suffering from stress in Seattle last week and went to the doctors office. He was told his insurance had been cut off. He called the office and found out he was going to be sacked. They just got a 3 day headstart. Their BS reminds me of Joe Gerbles and the Nazi propoganda machine from the 1930s.I suggest every one try 8 oclock coffee for a good coffee that’s been around for 150 years and doesn’t try to establish a brainwashed cult behind their product.