“What we have to do is simple: Differentiate our experience, so that when a customer walks into a Starbucks store, they get something that they can only get from us..” Starbucks (SBUX) CEO CEO Howard Schultz
Notes from the earnings call:
The financials:
** Revenues for the quarter were up 17% to $2.8 billion, from $2.4 billion a year ago.
** Earnings per share increased to $0.28 cents in Q1 of this fiscal year, compared to $0.26 cents per share in Q1 of ‘07.
** Dairy costs resulted in a negative $0.02 impact to EPS in the quarter.(ValuePlays readers first got this in May of 2007)
** Operating margins contracted 160 basis points to 12% from last year’s Q1 margin of 13.6%. (Dairy cost)
** Higher interest expense driven by an increased level of debt when compared to the first quarter of 2007. The debt was used to repurchase shares, resulting in a net neutral impact on earnings per share in the quarter. (Again, see May of 2007)
** A new share repurchase authorization by our Board of Directors for up to an additional 5 million shares
** For 2008 “we are looking to deliver low double-digit earnings growth — lower than expected”
The stores:
** plan to open a total of approximately 1,175 net new stores in 2008, down 34% from fiscal 2007 openings.
** Closing approximately 100 underperforming stores.
** For 2009, plan to open fewer than 1,000 new stores in the U.S.
** Will open approximately an additional 75 net new stores in international markets
** In fiscal 2009, that number will rise to over 1,000 new stores internationally,
Products:
** will discontinue warmed breakfast sandwiches in our North American stores
Plans:
** “At our Annual Meeting of our shareholders on March 19th, we will lay out five specific, bold consumer-facing initiatives that will be a major catalyst for change and transformation.” Schultz
The sentence that really mattered? “Comparable store sales declined 1% in the quarter, driven by a 3% decrease in transactions.” That is the whole ball of wax.
So Schultz and company have a plan? Here are some more helpful hints:
1- 100 US store closing just are not even the beginning of what is necessary
2- Differentiation? If I am going to pay premium prices for ANY product, I want a service level that equates. Most people feel the same way. I do not expect the service at McDonalds (MCD) to be the same as a Mortons (MRT). That being said, if I go to McDonalds and have to wait for my order to be completed, they politely ask me to go sit down and relax and they bring it to me. If I am in Starbucks, I stand in the “cattle line” and wait, and wait, and wait. Why?
3- Too many small locations. Now, I am sure the little locations are money makers but their proliferation has had a negative effect. Why? If it is a nice day, I do not mind stopping and dragging the kids inside to get some coffee, but, if it is raining, snowing and very cold, I won’t go in because there will be no place for us to sit and it is just too much effort to walk and and then turn around and go. The proliferation of the “counter stop” locations with no real sitting area causes a mental picture of Starbucks. I now (and so do others) pass them by when I see them because there now is an assumption of their lack of adequate seating. They have changed the perception of the company from a place to hang out and drink coffee to one of inconvenience.
4- Get rid of all the crap. There is just too much junk for sale and the stores feel claustrophobic. Has anyone ever purchases one of the cappuccino machines there for sale? I keep waiting to see lawn mowers for sale out front..
Starbucks shares are getting hit on Thursday and even with all the pain in 2007, they trade around 26 times this years earnings. They are by no means cheap. With growth expected to slow even more, there isn’t anything to warrant shares going higher anytime soon.
Disclosure (“none” means no position): None
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