Tag: mcd

Odlum Brown analyst Felix Narhi had an interesting call on Starbucks (SBUX)last week.

Recently Starbucks’ projected earnings per share growth of 17% to 21%, while previous guidance was 20% to 22% for FY 2008. Narhi said of this “While this performance and outlook would have been stellar for most companies, apparently some Starbucks investors were expecting even more, nevertheless, this reduction in earnings guidance is hardly a disaster, in our view.”

“Starbucks shares are cheap”, said Mr. Narhi, and they are trading at their lowest level since going pubic in 1992 (26.6 times trailing 12 months as of Friday). He rates Starbucks a “buy” with a $35 price target, down $1 from his previous forecast and he recommends aggressive buying in the low $20-range.

Here is the problem and it is a question of looking at price and implying value from it.

EPS Growth for Starbucks.
2004- 41%
2005- 29%
2006- 20%
2007- 19%
2008- 17%-21% (company provided)

So, we have 4 consecutive years of EPS decline. The last time that happened? Uh, never?!? Investors think there may be a fifth and that is a VERY good chance. That is the reason they are fleeing the stock. It is not due to a “temporary” disruption.

In those previous years Starbucks faced competition on a national scale from, um, nobody. Now they have the juggernaut that is McDonald’s (MCD) gunning from them and regional goliath Dunkin’ Donuts taking direct aim at Starbucks’ business. When one look at the results from those operations, the only deduction that can be made is that it is working. As McDonalds introduces espresso drink nationwide in 2008, that competition will only get more intense, putting more pressure on Starbucks earnings growth.

Mr. Narhi mentions the stock being at its lowest levels since 1992, well in 1992 the company was growing EPS at over 50% a year and there was almost 100 million LESS shares outstanding. Comparing the pure dollar value of a stock is just meaningless unless other factors are also considered.

I have said it here countless times and it has yet not to be true. As earnings growth slows, the premium investors will pay for a stock also decreases. That is simply what is happening with Starbucks. At 26 times trailing EPS, shares are by no means a bargain or an “aggressive buy”. A low share price does not automatically equate to value. Investors are not sure where the bottom is because they cannot get a handle on how much slower things will get. This is in part because of the fierce competition that the company has now it did not have even two years ago AND the lack of honesty or disclosure from management. Donald and Schultz seem to be in denial about their business and with the rest of us seeing it, we doubt everything coming out of Seattle HQ.

The fact they did not address milk costs until almost 2 months after I did ought to make current or potential investors very nervous. It is like they are closing their eyes hoping it will just go away and be ok.

In August management addressed the store traffic issue and said “we expect it to be short term issue”. Now we find out it will take until halfway through 2008 at best to get that straightened out. A “short term” year?

Back in May I said “With all the uncertainty surrounding the company at this point, I could not even begin to consider shares at any price other than the lowest end of the range, $22 or another 21% lower than current prices as I expect EPS growth to slow more.”

That price point now looks too optimistic, high teens are the range now. Those who blindly follow Mr. Narhi’s advice will be disappointed to say the least.

Think it is just Mr. Narhi? Check out the other analyst calls that would have had you throwing you money away in 2007 alone.

20-Nov-07 Friedman Billings Upgraded Mkt Perform to Outperform
16-Nov-07 McAdams,Wright,Ragen Reiterated Buy
16-Nov-07 UBS Reiterated Buy
16-Nov-07 RBC Capital Mkts Reiterated Outperform
16-Nov-07 Friedman Billings Reiterated Mkt Perform
16-Nov-07 CIBC Wrld Mkts Reiterated Sector Outperform
16-Nov-07 Robert W. Baird Downgraded Outperform to Neutral
12-Nov-07 UBS Reiterated Buy
08-Oct-07 Lehman Brothers Reiterated Overweight
27-Sep-07 Banc of America Sec Downgraded Neutral to Sell
02-Aug-07 JMP Securities Reiterated Mkt Outperform
02-Aug-07 McAdams,Wright,Ragen Reiterated Buy
02-Aug-07 RBC Capital Mkts Reiterated Outperform
02-Aug-07 CIBC Wrld Mkts Reiterated Sector Outperform
19-Jul-07 CIBC Wrld Mkts Reiterated Sector Outperform
18-Jul-07 Lehman Brothers Reiterated Overweight
02-Jul-07 Bear Stearns Reiterated Outperform
22-Jun-07 Friedman Billings Downgraded Outperform to Mkt Perform
15-Jun-07 Lehman Brothers Reiterated Overweight
08-Jun-07 Deutsche Securities Reiterated Hold
21-May-07 CIBC Wrld Mkts Reiterated Sector Outperform
02-May-07 CIBC Wrld Mkts Reiterated Sector Outperform
18-Apr-07 Lehman Brothers Reiterated Overweight
01-Mar-07 Prudential Reiterated Neutral
30-Jan-07 JP Morgan Upgraded Neutral to Overweight

Only 1 sell in the whole bunch….. sad

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I always go to the Q&A because it really tells you something about management, both in their candor what they are looking at.

Starbucks (SBUX)CEO James Donald said at one point:

“Let me just add to that. When we examine the competitive landscape, I think one of the things that we have not done a very good job of, because we haven’t had to, is just examine and leverage the assets that the company has that’s meaningful to our customers.

As an example, most people that are entering the space and creating lots of noise are not coffee roasters. They don’t have 35 years of history and heritage around sourcing, buying, blending, and providing the customer with a fully comprehended, vertically integrated experience. That’s an asset that is very, very important to our customers and speaks to the quality, the loyalty, and the trust they have in Starbucks.

We have not really had to tell that story for many, many years because we haven’t been concerned about people trying to in any way create attrition for us.

The issue of competition I just want to address, is that we take it extremely, extremely seriously. We understand all too well that we have built a very attractive business for others to look at and try and take away, whether it’s 1% on the margin or big companies that are trying to take more. We are up for the defense and we are going to get on the offense.

I want to make it clear also that the size of the prize is so large and although I’ve said it so many times, I need to say it again; we have less than 10% share of the total coffee consumption market in North America and less than 1% in the world. As what has happened in many consumer products when there is new awareness, it creates a new trial among consumers who have not yet been in the category. That is taking place as we speak.

Those consumers over time are going to trade up. They are going to trade up because they are not going to be satisfied with the commoditized experience or the flavor. We will do everything we can to ensure the fact that when they trade up, they are trading up to the company that built the category and is the leader and that, ladies and gentlemen, is Starbucks. And you can be assured that we are deeply, passionately committed to preserving our leadership position.”

If all that is true, then why are people fleeing? Why are comps down at Starbucks but up at McDonalds (MCD)(I am just considering coffee) and Dunkin Donuts? What is happening out there is Donald sells a commodity that people are very price conscious to (despite his claims). That simply means that when given the option between comparable products, price and convenience win.

They are “trading up” as he says it but they are trading up to less expensive option. What Starbucks refused to admit it seems is that the competition has a quality product and it sells for far less. Also, does anyone really care about their “vertically” integrated operation? Some may, but not enough to keep the 20% EPS growth the company touts for next year.

CEO Donald responded this way to a question asking for an explanation of the negative traffic comps.

“I think that when we look at the softness in transactions, there’s a couple of things unfolding, and I mentioned them in my remarks. There are other operators in this specialty coffee business, but that doesn’t necessarily link in to this softness in comps. I think what you have to look at is just the pure and simple economic trends that we see.”

He actually said other operator do not “necessarily link to this softness”. Incredible. The only take away here is that he does not accept the simple FACT they are losing business to the competition. Are these folks just not drinking coffee anymore James? Staggering… Has he seen McDonald’s numbers and transaction growth?

Even trading down 40% for the year to levels not seen since 2005, the stock still trades at 27 times current earnings and 22 times next years and if you believe they will hit the numbers they project next year, well, sorry..

Starbucks is still thinking like they are a little specialty niche operation and not the mega-chain they are. You cannot continue to growth a $16 billion dollar operation 20% a year by appealing to a smaller and smaller segment of the public. Especially when your competition and yes James, McDonald’s and Dunkin Donuts are your competition and they have raised their game to match yours on several fronts.

This is just bad…

Read the whole transcript here:

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“We only have 10% of the US coffee market” says Starbucks (SBUX) Chairman Howard Schultz. So, by that logic ought we expect 18% growth from Mercedes because they only have 3% of the US auto market? Me either and thus the problem with Starbucks

I would be willing to bet they have 95% of the US coffee market that would be willing to pay $5 for a latte. That being said, we now have Starbucks’s central issue. The market they are selling to is only a fraction of what they think it is and they have virtually tapped out that smaller market. Schultz & Co. cannot continue to promise 18% to 20% growth when the number of people in the US they are serving has been stagnant for the current year. Consider the following chart from the WSJ.

Some folks have made the case that Starbucks grew too quick and saturated their market. Quite the contrary. They still have the same number of locations in the US as McDonalds (MCD) but the different is the coffee is more than twice as expensive. How could Mercedes increase their market share? Lower the price of the cars. How can Starbucks? Lower the price of its coffee.

Starbucks is caught here though between market share, maximizing ever penny per cup and growth. They have promised to expand to 40,000 stores and to back off that would scare investors. This is the problem will such bold predictions much like Home Depot(HD) is seeing with the shares repurchase plan, if you can’t deliver, people are less than pleased with you. This causes management to fight reality. Always under promise and over deliver.

When you have two products that are similar, price and convenience always win. Now, does McDonalds have the “super premium” blends and the variety of drink offering Starbucks has? No. But what they do have is a very good product at very reasonable prices. What they have done is take a huge segment of Starbucks current and potential customers who are looking for value.

If you look at the chart above one thing has to stick out, Starbucks “no growth” periods in the US coincides 100% to McDonalds coffee improvement.

What to look for today? Transactions. Did they grow over last year and IF they hit their EPS number, was it due to the addition of debt to buy back abnormally large blocks of shares like they did at the beginning of the year.

My guess? Flat to negative transactions and an earnings estimate miss. The good news? They start coming up against much easier comps in the next quarter so the illusion of growth can at least be there for those investors still holding on.

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Well, that did not take very long at all.

Last week I proposed a situation in which the free WIFI offered by Mcdonalds (MCD) in Britain would be landing on US shores soon enough and this would prod Starbucks (SBUX), who currently charges for it, to begin giving it away. It seems this may be happening sooner rather than later.

The following day, the same sentiment was echoed at Computer World.

Asked about the scenario, Brandon Borrman, a Starbucks spokesman, didn’t downplay the idea when he told the Seattle P-I that the company doesn’t comment on rumors or speculation. That was an oddly similar response he gave regarding a prediction from an analyst earlier this year that Starbucks would raise its coffee prices, which the company did shortly after saying it wouldn’t comment on rumors or speculation. If they do not say “no”, they are saying “maybe” or “we can’t say yet”.

This really wasn’t a bold prediction but a common sense one. Starbucks just cannot afford to let anymore customers defect to McDonalds. Whatever they need to do to keep these people they have to do.

Want to think about something scary? For the current year, McDonalds trades at a PE ratio of about 2/3 that of Starbucks despite growing earnings this year almost as fast, has a 2.6% dividend yield (that it plans to increase 50%) compared to the 0 Starbucks sports and is increasing its earnings outlook almost every time they make a public statement while Starbucks is constantly reminding how “difficult” meeting expectations will be for them.

Shares of Starbucks, currently at $26, 46 cents above a two year low are standing on a precipice…..it won’t take much to push them over the edge..

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Mcdonalds (MCD) announced they are going to provide free WIFI in its 1200 UK restaurants. Why does Starbucks (SBUX)care?

Doesn’t the Green Mermaid also provide its customers WIFI? Yes they do but in Starbucks customers have to pay for it. Is this a huge deal that will sink the House that Schultz built? No. But, it is yet another reason for people not to go to Starbucks.

What McDonalds is doing is offering people another cheaper alternative to the pricey Starbucks. Since January Starbucks has seen milk and coffee cost spiral upward. They came in third in a taste test between them and McDonalds and Dunkin Donuts. Ignored the improved coffee and value proposition McDonalds offered customers. Increased prices, the second such action in less than a year and sat by and watch its customers defect to McDonalds who sales are up 15% to date this year and has never sold more coffee than it is now.

Now WIFI. If anyone thinks this will not happen in the US very soon, guess again. What will happen is the legions of salespeople out there who rely on their laptops will be frequenting the Golden Arches for a meal, a cup of coffee and free WIFI. Cost conscious college students will forgo their starbucks WIFI for the freebi at McDonald’s.

Will Starbucks then be forced to give it away? Maybe they will. But even of they do, they still do not come out the winner because folks do now have another option AND another revenue stream for Starbucks is choked off. It won’t amount to a huge amount but when when you are sticking by your 18% to 20% EPS growth, trade at 32 timer those earnings and face the aforementioned challenges, every single penny counts…

Just how long will it be before management comes clean and dials back EPS expectations?

No press conferences pronouncing the “dominance”, “super-premium product” or saying they have the “market bought”, just a neat little thing called estimate crushing results. Got to love McDonald’s (MCD)

McDonald’s delighted investors with much stronger than expected same store sales in August.

Asia/Pacific/Mideast/Africa: + 12.4%
Europe: +6.1%
US +7.4%
Company-wide: +8.1%

How good are those results? Consider Goldman Sachs (GS) had projected US same store sales to be up only 4% and Bear Stearns (BS) had estimated just a 5% increase. CEO Jim Skinner said, “Our worldwide sales momentum continues, thanks to our customer-focused emphasis on menu variety and value, convenient service, innovative marketing and contemporary restaurants.” That is it, a one sentence release and their results speak for themselves. No chest thumping or bashing of the competition, when you are in first place, there is no need.

Starbucks (SBUX) could learn a thing or two here. Rather than running around telling everyone how great you are, just go out and prove it. Stop giving press conferences saying “we have bought all the super-premium beans” or that “we have no competition”, you do and whether you know it or not they are whipping your butt good.

McDonalds reminds me of watching Earl Campbell run as a kid. He never said a word, just went out and did his job, running over opposing defenders. Everyone knew he was getting the ball and they could not stop him. He would get up after each tackle looking old and tired as if he was on his last breath and then the ball would be snapped and he would outrun everyone 80 yards to the endzone and then just drop the ball. No fancy dance, no spike, just results. McDonald’s is the same way, we never hear anything from them until they blow the door off another estimate and the stock keeps increasing to ever higher levels.

No show, just results….

Just when I think Starbucks (SBUX) could not be any further off the mark than they are now, they prove me wrong.. sorry shareholders (again).

In Mexico, CEO Howard Schultz said “At the very top of the market where Starbucks plays, I do not believe that others will have access to the quality of coffee that we are buying because we have secured those sources,” Schultz said.

What Schultz did not say was that Starbucks’ size of 13,000 thousand plus locations prevent them from sourcing their beans from smaller, artisan growers capable of growing the highest quality coffee beans. Instead, they require a “best of the biggest” approach, where they deal solely with growers who can supply coffee beans in large enough quantities to meet their huge distribution needs.

Let’s put that obvious one aside. Let’s deal with the “super premium” comment. Has anyone ever seen an ad where McDonald’s (MCD) or Dunkin Donuts claimed “super premium”? Me either. What they do offer is “very good coffee and very good prices”. They call it “gourmet” but that could just mean “doesn’t suck” and based on the money pouring into both companies from coffee sales, any alleged shortage is not affecting them. Let’s assume they are buying the same beans (I will play along Howard). If you are a coffee grower and are approached by Starbucks and McDonalds, which dwarfs Starbucks in size, and both want to buy your beans, are you going to put all your eggs in just one basket? If you are, would it be the smaller guy?

Schultz, it seems, has fired a shot over the bow of, well, Starbucks since only they seem to think they require all the “super premium” beans. There may be a slew of small European cafe’s affected by this alleged shortage, but McDonald’s and Dunkin Donuts will not be. Also, whether Schultz or anyone else at Starbucks wants to admit it and clearly they do not, this IS their competition and it IS where their former customers are getting their coffee now.

“Starbucks is not an advertiser. If other companies are going to advertise and promote specialty coffee, Starbucks is going to benefit in the long term,” Schultz continued. Well, maybe he ought to be because they clearly are not in the short term. He needs his company’s products to be defined by something other than their high price which his “competition” has managed to do to them. Starbucks allowed their brand to become equatable to Mcdonalds (MCD) and Dunkin Donuts, now they need to spend money to change that or the comparisons will not end and they cannot compete on value with either of them. Just when I think things may begin to change…. nope

I can’t wait for the next one.

I wonder if executives at Starbucks (SBUX) feel like a deer in the headlights of the freight train that is McDonalds (MCD).

McDonald’s announced today that global comparable sales rose 6.5% in July, well ahead of the 4% estimates. Systemwide sales for all McDonald’s restaurants (this number includes franchises) worldwide increased 11.7% for the month.

McDonald’s Chief Executive Officer Jim Skinner said, “We continue to connect with customers through our menu variety and value, innovative marketing and contemporary restaurants. These combined initiatives have powered our ongoing momentum and delivered our best sustained sales performance in more than 25 years.”

U.S. comparable sales rose 4.3% in July due to the enduring appeal of McDonald’s popular breakfast menu (COFFEE), new food offerings, value and convenient late night hours.

Comparable sales were up 9.9% in Asia/Pacific, Middle East and Africa, driven by ongoing sales strength in Japan, Australia and China. Breakfast (COFFEE) and extended hours contributed to the segment’s July performance.

Year to date system wide sales for McDonald’s are up 11%. No excuses about rising coffee and milk prices, no new recording labels or free t-shirt giveaways, just performance quarter after quarter by focusing on what they do best..

Novel idea…

Starbucks (SBUX) released earnings Wednesday and the results were well, uninspiring? They reported a 9 percent rise in quarterly earning, helped by more than 1,000 new stores, and backed its full-year profit outlook.

Net income for the fiscal third quarter was $158 million, or 21 cents per share, in line with the average estimate of Wall Street analysts. Last year, Starbucks earned $145 million, or 18 cents per share.

Sales at coffee shops open at least 13 months, a key retail measure known as same-store sales, rose 4 percent. Customer transactions increased 1 percent, while the average value per transaction was up 3 percent. Here is the quote that matters and it is from my buddy CEO Jim Donald. He said in an interview that “a lot of things” kept customer transaction growth small, including new stores taking business from older ones and weakened consumer spending.

“Maybe people aren’t going four times a week,” he said. “Maybe it’s three times a week.”

Okay, so I have not been crazy after all the last 6 months in saying people are not going to the stores as often as before?

Starbucks earlier this week raised prices on coffee and other drinks by an average of 9 cents a cup. Chief Financial Officer Michael Casey said in another stunner that, while price increases have not historically affected customer traffic, this time could be different since the company raised prices less than a year ago.

“We acknowledge the possibility that it might have a short- term negative impact on traffic,” he said. Where have we heard that before?

Also for the first time in my memory Casey admitted “I don’t expect that the bottom line growth rate, absent some transformation in the business, is going to re-accelerate up to the 25 percent level again,”.

The only people who should be happy about this call are the SBUX shorts and McDonalds (MCD) shareholders. In one call they admit that their new prices will shrink store traffic that is already falling and that the big growth days are over. This call for a re-evaluation of the premium people should pay for shares and that premium will be lower (and it is not 35 times earnings).

If they are relying increasingly on prices increases and ancillary sales for growth, lower store traffic will compound the negative effect on that..

Let’s reverse everything. was there anything on the call that would make you think the current trends, which are negative, will reverse? Me either..

Here is another great take on Starbucks from Jeff Mackey

You own a business that is suffering declining store traffic for consecutive quarters. Your business is being challenged by competitors that offer a quality product at a fraction of the price you charge for yours. What do you do? If you are Starbucks (SBUX) you raise prices and make the affordability gap between you and your competitors even greater? Please tell me how this make sense.

Starbucks recently announced that meeting estimates for the upcoming quarter “would be a challenge” due to higher milk and coffee prices. Now, if they were serving more people each day, this decrease in margins would be offset by the additional transactions. What this warning tells me is they are still facing stagnant or declining store traffic in addition to decreasing margins. Can anyone explain how making your product less affordable will solve this store traffic issue?

I mean, Mcdonalds (MCD) and Dunkin Donuts both serve milk and coffee so we must assume they are facing the same cost pressures, right. It would be foolish to assume only Starbucks is facing these issues. Today McDonald released results and revenue came in 12% higher at more than $6 billion, while sales at restaurants open for more than a year were up 7.4%. They also met expectations of 71 cents a share profit from operations, 26% higher than last year and Starbucks admits they are struggling . How did McDonald’s do it? They sell a quality product at affordable prices, novel. Said CEO Jim Skinner “In the U.S., we are aggressively going after the $60 billion beverage industry with the focus on coffee. We added credibility in this arena now with lots of premium coffee last March. Today, premium coffee sales are up 20%. This credibility gave us brand elasticity to expand further into specialty beverages. Currently, we are testing a wider range of offerings including hot and cold drip coffee beverages an espresso-based coffee and ice beverages. We are encouraged by the preliminary results. Including these specialty offerings, total coffee sales are up more than 30%.”

I have been pounding this point since January, Starbucks is at the peak of what they can charge for a cup of coffee. Increasing those prices will lead to further decreases in store traffic and with Starbucks now relying on more ancillary sales to customers for revenues and profits, decreased visits now have a compounding negative effect on the bottom line.

I also fully understand the hard core Starbucks “aficionados” will continue to visit Starbucks no matter what type of home equity loan becomes required to purchase a latte, it is the casual customer who is walking away in hoards and the numbers continue to back up this assertion. Goldman Sachs (GS) analyst Steven Kron said today that higher prices could reduce store traffic given the state of the consumer, media coverage and increasing competition in the coffee space. Not could Steve, will.

The only way for Starbucks to reverse this decline is to get more people into their stores. Once there they will buy more muffins, sandwiches, CD, toaster ovens, and SUV’s or whatever else they sell there now. Raising prices will not accomplish this. If the consumer is becoming more cost conscious and recent retail sales report would support this than one must assume discretionary items like a cup of coffee will be one of the first items they will pinch pennies on.

I also recognize that it is only 9 cents on some drinks (ones in cups?), but we live in a appearance is reality world out there and the last thing people want to hear nowadays are the words “price increase”. It is a turn off and the extra revenue they may get per cup is more than offset by the negative sentiment they are creating.

I have asked this question repeatedly and have yet received a decent answer. Why should I pay $5 for a cup of coffee when I can get the same thing for $2 other places and not have the DMV like “wait in line” experience?

Answer? I shouldn’t and apparently increasingly other folks are not either.