Of course they slipped in an SEC filing and did not actually say it out loud. There have been few companies that I have covered that have been either as clueless as to their business environment or dishonest about it with shareholders than Starbucks (SBUX) had over the past almost two years now.
Back in Feb. 2007 the CEO Jim Donald claimed that McDonalds (MCD) then new entry into premium coffee would be a benefit to Starbucks as McDonalds’ customers would then trade up to him. At the time I detailed to folly of this statement and said “I advise any potential new shareholders to avoid shares…”. Shares at $34
Less than a month later then retire founder and former CEO Howard Schultz penned a memo saying, without naming, that “competition has created awareness” of themselves, the company had “got away from its roots” and that it was affecting results.
In May 2007 with milk prices soaring and flimsy earnings out I detailed how dairy price would hurt them despite the fact management denied it would affect earnings and CEO Donald said “we do not consider the competition” when asked about McDonalds. Um….can’t really even add to that…Shares sit at $28
Only weeks later Starbucks switched from whole milk to 2% in all drinks for “customer service” reasons and at the time I said it was all about milk prices, then at decade highs..(2% is cheaper than whole)
Fast forward a month, Starbucks issues a profit warning and says “rising dairy costs are a challenge”…..duh..
Then came the announcement of the near $6 salad. At the time I commented that for a company that Schultz had lamented had “got way from its roots” in his famous memo, nothing they had done since then was a return to them.
Then just in case you weren’t convinced the ship wasn’t drifting listlessly, in late July facing declining stores traffic and an increasingly cash strapped consumer Starbucks did what???? Raised prices…
Less than a week later Starbucks admits increased prices leads to less store visits by customers….yet they maintain price levels…
Finally in September Starbucks admits “dairy prices will be a negative into 2008″…Shares now priced at $27
In Jan 2008 Schultz finally did what I begged him to do for almost a year a fired Donald
In Feb. 2008 they admitted what I hope anyone who has read the blog already knew, the coming year would be a poor one. Shares priced at $18
In March things got weird. Starbucks decided that they were going to start a social site so folks who loves the place can go online and talk about it…..more of Schultz “going back to the roots” of the company?
In May we find out the fired CEO Jim Donald cannot work “for the competition”….McDonalds..but, we thought they weren’t??
In July Starbucks started playing games with the earnings release to hide how bad results really were. Shares priced at $14
In August Schultz gave an interview in which he called the coffee at McDonalds and Dunkin Donuts “swill”, said he won’t “dilute the brand” by “going down the fast food road” and then does just that only days later with the “$2 after 2” promotion. Shares priced at $14
Current day. I have stopped following Starbucks as close as before because with the stock at $9 vs the $34 it was at when I told folks to run from it, I hope the story is clear for all to see. But, I could not let this one go by.
The filing to the Securities and Exchange Commission sheds light on how much of a threat new competition is to Starbucks, as McDonald’s Corp. and other restaurants add espresso drinks and more elaborate beverages. In the filing, Starbucks says that, in the U.S., “the continued focus by one or more large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages at a low cost has attracted Starbucks customers and could, if the numbers become large enough, adversely affect the company’s sales and results of operations.”
Not bad…..it took 22 months for them to either recognize or admit it……
Just terrible…
Disclosure (“none” means no position):Long MCD, none
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3 replies on “Starbucks: 2 Years of Missteps & An Overdue Admission.”
Todd, I have been following you for over a year now and I really enjoy your perspectives. However, I am shocked with your analyst type gloating and superficial assessment that all of Starbucks woes are due to factors you have listed. It is very unbecoming and I wish you would get back to your roots of non-partial and big-picture/small picture value investing.
Most of your analysis is always fundamentally balance sheet based and not newspaper headline oriented, with the exception of Starbucks. Considering your positions in SHLD, BGP, and even DOW that have many similar political concerns over the past several years yet neverthesless have balance sheet and political relationships arguing for holding a position or even adding, your failure to assess any similar issues with Starbucks make your commentaries appear superficial and short oriented analyst bashing, especially since you disclose your long position in McD.
Simply shortly, Starbucks’ cash flow, international growth, change in direction in store openings(and closings) with the logical consequence of increased cash flow over the next 3 years with no debt burden in danger of being compromised puts them in a good position to continue to build brand value and earnings per share. The quality of the product is obviously still considered a unique selling proposition in contrajuxtaposition to other competitors as evidenced by their ability to expand in markets where other coffee experiences have strong traditions. In addition, it is clear that past CEO’s lost focus on building the brand and while Dell and Yang have failed, Jobs has been a resounding success in the return of the old CEO business. Considering the worst market in over 20 or 80 years, depending on your perspective, it is very disturbing and inconsiderate of other views, even if you are correct, for others that do hold Starbucks and are currently feeling pain across the entire portfolio.
If one were only to follow the newspaper headline macro subjects, it would have been nice if you would have advised investors to run from SHLD, as the losses have been over $100 per share in the same time frame as opposed to Starbucks’ meager $25 cut.
Congruity and consistancy has been one of your value investing strengths that for some reason with Starbucks has devolved into to an emotional, one-sided ‘schaden-freude’ bashing.
I hope it remains the exception rather than a new trend.
B,
you’ve missed the point. starbucks’ operating environment has changed forever and it only now is recognizing / acknowledging it and is doing nothing to counteract it.
dow, bgp recognized it and have taken actions to change themselves and thus the value in their shares in my opinion.
on a % basis the losses at shld and sbux are essentially equal. that being said, lampert is taking steps to alter shld, sbux is still refusing to admit what is happening…
i would also argue housing has a far greater effect on shld than sbux and that their is nothing lampert can do about it now.
if sbux admitted or was trying to change its reality, i would not be hard on them.
one cannot help but question their honesty with shareholders
I understand your criticism. and I also see your point about comparative transparency. However, I do not place them on an ‘honesty’ pedestal while I am witnessing what havoc true and criminal dishonesty has wrought on our financial system. I perceive it as idealistic error or optimistic delusion, if you will, and the market has punished them severely.
It is also apparent that since Mr. Schulze’s return he has recognised many deficiencies from menu to margins to cannibalisation to growth to balance sheet building, all of which he has addressed, correctly or incorrectly. There has been more change of direction in the last 18 months than in the last 10 years. And, to repeat myself, at a very distressed timepoint in the financial markets. I believe you would also agree that Starbucks’ mistakes are not solely responsible to their fall to $8.
I agree that the operating environment has changed forever. I also agree that they have been slow to realistically assess the influence of matrial factors. However, I do not agree that the two are necessarily logically sequential to one another as you connect them in your first sentence. Business environments are always changing and people will always make mistakes. It is clear that is the reason why investing is a fluid activity of assessing the value of present and future cash flows and the premise that values will change over time – because businesses and customers change.
Eddie Lampert was also slow to recognise that he is not effective when attempting to control all of the retail decision making and after months of languishing took steps to reorganise his management team.
Eddie Lampert was also agressively buying back SHLD stock in 2008 although many indications that the housing bubble was bursting and at least more difficult times lay ahead were apparent. As a SHLD shareholder, I cringe to think of Lampert buying back shares at $125 when I see the current price. For a master capital allocator it appears in hind sight as a truly awful destruction of shareholder value. However, mistakes in the present are possible when one is clearly fixed on greater objectives for the future.
And in the case of BGP, they recognised it and have tried to change it. However, their perhaps more admirable behaviour has done nothing to improve the performance of the company from a balance sheet standpoint. Starbucks as an investment with respect to assets and cash flow remains much more attractive with more value opportunity than BGP.
However, not to digress into strategic perspectives, at the end of the day, or at the beginning if you will, the value investing thesis always returns to the fundamentals. Is that not what we as value investors look for – business/operational mistakes and/or challenges that are correctible and for which the market has nevertheless unduly punished the share price?
Obviously, the Starbucks thesis revolves around their growth numbers, their cash flow and the picture of the company with slower growth and greater cash flow staying in the company. There are clearly also positive takeaways in the universally accepted stature of the brand name that they have created – as with SEARS brands and their desire to monetise them.
I watched McD’s crash and burn and then they started making salads and tooling with the menu and their stock price is now one of the most stable. And the very fact that they are still growing even though they serve basically burgers and fries indicates that sticking with a core concept and repeating it 40.000 times can prove to be successful. And obviously, there are more burger joints than there are espresso bars.
I honestly believe you are missing the point of objective takeaways of the pros and cons analysis for whatever reason.
But I appreciate the opportunity to discuss it with you and remain,
respectfully
Boethius