Tag: sbux

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Some big names today..

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TLB The Talbots, Inc 13.33
TLAB Tellabs, Inc 8.31
SIX Six Flags Inc 2.89
SGTL Sigmatel Inc 2.35
SEAC SeaChange Internation … 5.55
SBUX Starbucks Corp 24.88
RVI Retail Ventures Inc 7.74
RT Ruby Tuesday, Inc. (G … 14.84
RPT Ramco-Gershenson Pptys Tr 25.86
RNIN Wireless Ronin Techno … 3.40
RMKR Rainmaker Systems 6.23
RMIX U S Concrete Inc 4.59
RL Polo Ralph Lauren Corp 64.79
LOW Lowe’s Companies, Inc 25.25
LOOK Looksmart Ltd 2.30
LM Legg Mason, Inc 75.10
JCP Penney (J.C.) Company … 51.81
JBLU Jetblue Awys Corp 8.52
JAS Jo-Ann Stores Inc 17.07
HELE Helen of Troy Ltd 17.02
HDL Handleman Company 2.10
HD Home Depot, Inc 29.78
COH Coach Inc 34.08
COA Coachmen Industries, Inc 5.90
CNA CNA Financial Corp 36.49
C Citigroup, Inc 35.39
BAC Bank Of America Corpo … 44.11

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It really doesn’t matter what management says at this point as their track record in the issue is spotty at best. It isn’t rising coffee, dairy prices or the likely event that 1 billion Chinese tea drinkers will not instantly convert to coffee. It is a red headed guy in a funny suit.

McDonald’s(MCD), after test marketing cappuccinos and iced coffee in various markets, is ready to begin rolling out a makeover of all its U.S. restaurants by 2009 to feature specialty beverages such as coffee drinks, smoothies, energy drinks, and other bottled beverages. It is estimated the move will result in an additional $1 billion in sales for the company.

Selling specialty drinks is the final piece of a vast beverage plan that has taken direct aim at Starbucks (SBUX). In the last few years, the two companies have tried to cut into each other’s core businesses, with Starbucks thus far unsuccessfully adding breakfast sandwiches and McDonald’s selling premium coffee. The strategy has worked for McDonald’s, whose coffee sales have risen 15% since the upgrade last year and has spent the past year testing iced coffee, mochas and cappuccinos in various parts of the country.

In test markets including California, Georgia, Michigan and Texas, specialty coffee has increased customer traffic by 44% a week. Most importantly, the initial tests show the new plan doesn’t require more employees or slow down service. This is again contrary to Starbucks sandwich results in which the additional was fraught with production problems and customer complaints of even further deterioration of service times.

McDonald’s plans to equip 1,500 restaurants to sell the new drinks by the end of 2007, with the rest completed by late 2008. Specialty beverages such as lattes have much higher profit margins than sandwiches. Sales in this new beverage category could rise by 90% in the next five years.

The billion dollars a year in sales are not going to be created out of thin air. They are going to be at the expense of Starbucks and other coffee chains. Obviously it will not be a dollar for dollar offset, but for a company planning to grow 18% a year to have a 13,000 store behemoth selling your products for far more affordable prices, one has to wonder where that growth is going to come from?

One thing is for sure, don’t look to management for a straight answer.

Just in case Starbucks thought the bashing was finally over…

Banc of America (BAC) downgraded Starbucks (SBUX) to Sell from Neutral, and lowered their target to $23 from $27, as they see downside risk to estimates due to slower growth. The firm is concerned that expectations for a near-term recovery are too high.

The analyst, Mr. Barrish wrote, “Although we believe that the company controls a very strong brand and can continue to grow, we believe the pace of growth will be slower [with international business still too small to make significant contribution to operating profits, and could be several years away from such a contribution], and that expectations are too high for a short-term recovery.”

He added, “We also believe that store operations have ‘slipped’ and longer lines, more complexity and less-than-stellar-looking assets could be causing a modest decrease in sales in this challenging consumer environment.”

I guess the first question isn’t “is he right” but “where have you been”? I mean, none of this stuff is an enlightened opinion and those of you who read ValuePlays have been seeing the same sentiment since Fenruary when shares were sitting at $35 each. Shares were down some 2% yesterday and there isn’t really anything to stop the fall on the horizon. If anything, the upcoming earnings release may do more harm than good as it is looking more apparent everyday that meeting their number is becoming less and less likely. What took the analyst almost 10 months to see what the rest of us already new? Also, the fact that shares dropped so much despite all this shows how much “hope” is still baked into the current price.

Starbucks may give us a valueplay soon enough. But shares will fall further first..

UPGRADES

Fresenius Medical FMS Bernstein Mkt Perform » Outperform
EchoStar DISH Oppenheimer Neutral » Buy
SAVVIS Comm SVVS Lehman Brothers Equal-weight » Overweight
Oriental Fincl Grp OFG Keefe Bruyette Mkt Perform » Outperform
Rightnow Tech RNOW RBC Capital Mkts Underperform » Sector Perform
SiRF Technology SIRF Credit Suisse Neutral » Outperform
KKR Financial KFN Bear Stearns Peer Perform » Outperform
Wal-Mart WMT Rochdale Securities Hold » Buy
Westell Tech WSTL Robert W. Baird Neutral » Outperform
Kindred Healthcare KND Wachovia Underperform » Mkt Perform
Prudential Plc PUK Bear Stearns Peer Perform » Outperform
Magna MGA CIBC Wrld Mkts Sector Perform » Sector Outperform

DOWNGRADES

Signature Bank SBNY Sterne Agee Buy » Hold
PetroChina PTR Bear Stearns Outperform » Peer Perform
Healthways HWAY Credit Suisse Outperform » Neutral
Statoil ASA STO Credit Suisse Outperform » Neutral
Alesco AFN Bear Stearns Outperform » Peer Perform
Fluor FLR Morgan Joseph Buy » Hold
Starbucks SBUX Banc of America Sec Neutral » Sell
ResMed RMD UBS Buy » Neutral
Gamestop GME UBS Buy » Neutral

Why would you give away one of the most popular items available today? Maybe it is the only way to get people into your stores?

From Oct. 2 to Nov. 7, Starbucks (SBUX) more than 10,000 U.S. stores will hand out about 1.5 million “Song of the Day” cards each day. The cards can be redeemed at Apple’s (APPL) online iTunes Store.

Thirty-seven artists with featured songs include Paul McCartney and Joni Mitchell – the first two to sign on with Starbucks’ Hear Music label – along with Joss Stone, Dave Matthews, John Mayer, Annie Lennox and Band of Horses.

Starbucks and Apple recently announced they will allow users of Apple’s iPhone and new iPod Touch to directly download songs playing in a Starbucks to their iPods. A Starbucks icon will light up on the iPhone or Touch whenever a user is within range of a Starbucks shop’s Wi-Fi signal. Great, but, why give it away?

Why is this bad news? If you are the #1 coffee chain and are going into business with a company that has a product essentially in a category of one, why give it away? The very first thing that comes to my mind is that Starbucks has seen further deterioration of already anemic store traffic. There ought to be a natural curiosity of the new service that would cause an increase in traffic as people come in to check it out without cutting 99 cents of what they make on a cup of coffee. Unless, unless, traffic has fallen so much recently that Starbucks is in fear of an earnings miss and is pulling out all the stops to generate whatever revenue it can for the quarter.

Starbucks is already on record saying “meeting the high end of earnings expectations will be challenging” and this action illustrates that it just might be more challenging than they are even admitting.

Both Apple and Starbucks rarely give anything away, for Starbucks to do it now smells a little like desperation.

I have spent the better part of a year now detailing the missteps of management at Starbucks (SBUX) and predicting their current predicament but, I have to come to their defense on this one.

The National Labor Relations Board has accused Starbucks of illegal anti-union activity at a store in Michigan. This is the second charge it has received in the past month and the company is currently on trial in New York on charges of union-busting efforts involving the International Workers of the World. Business Week recently took a look at Starbuck’s situation and compared them to Wal-Mart (WMT). Not good for a company that has long ridden the “good corporate citizen of the world” train. Here is the thing, they actually earned that title and deserve it. While I have been a bit vehement in my criticism of their business moves (or lack thereof), Starbucks does treat its workers very well.

Should Starbucks be fighting union activity? Hell yes! Can anyone think of anything positive unions have contributed to their workers since the 1940’s other than predictable layoffs, salary cuts and the eventual destruction of the businesses their “workers” are employed by? For proof one need look no further that the US Auto and Airline industries for proof. Both industries, totally unionized and strapped with impossible labor costs are perennially doomed watching one or more of its members battle with bankruptcy. The UAW has seen its ranks decimated and hundreds of thousands of its workers lose their job because they view the employer as the enemy, not a partner. In negotiations they either “win” or “lose”. The problem? when they think they “win”, they actually lose more long term.

So yes, Starbucks and Wal-Mart ought to fight the unions with every once of corporate soul they have. Not just for shareholders, not for management but for the soon to be unemployed workers they will layoff if the unions find their way into their businesses.

What unions today fail to realize is that management has a fiduciary duty to its shareholders. That means keeping labor costs in line. If the unions do “win” and get in to either location, they will get their salary increases to ridiculous levels, there will just be a whole lot less people getting a check each week. How is that good?

Just ask GM (GM). They will lose about $100 million a day when workers walk out today…. GO UNIONS!!!

Back in May I posted “Starbucks (SBUX), which uses an estimated 93 million gallons of milk a year, is looking at a $279 million milk bill in 2007. While it may not seem a lot to a billion-dollar company, it does equate to 36 cents a share, an increase of about 9 cents, or about 10.3% of profits, over 2006. This does not include the price increase to be incurred from changing the percentage of hormone-free milk from 27% to 37%. Starbucks does charge 50 cents more at some locations for this milk, so it must cost considerably more, no? When you are guiding 83 to 87 cents a share and 18% growth, the 10% of that in milk costs is huge.

I followed it up at the end of the month with a post that exposed the real reason for Starbucks’s switch to 2% milk “According the USDA, 2% milk averages 8 cents a gallon less than whole milk” and said it was the real reason for the change, not their stated reason of “listening to customers”.

Near the end of June I took management to task when they finally admitted “rising dairy cost” would make meeting the “high end of earnings estimates very challenging”. In it I wondered said “When some guy in Massachusetts is more honest with you about a company he has no financial interest in than the people you entrust to run it, there is a serious problem.”

As recently as the end of last month in a post I objected to a report that milk prices were due to fall in the very near future.

Where is all this going? Peter Bocian, CFO at Starbucks, said Wednesday that the company expects dairy prices to be a “negative” in 2008. He said that the company has tried to offset the higher prices of dairy and other commodities through two price increases in the last 12 months. Here is my beef. Starbucks seems to just let this stuff trickle out very ambiguously without really giving investors anything to quantify. Starbucks must contract out is milk purchasing so they must have a solid idea of what the “negative” will be but, they give us nothing.

I have made several calls to Starbucks corporate offices and have been told “we do not disclose that information”. So, we are left to guess. Since they have been in such denial about it and very slow to announce it to date, the guess must be to the downside to protect you. Despite Starbucks’s claims and reaffirmation of guidance, I am convinced investors have a earnings warning or downgrade in their future.

Starbucks has just been too secretive to expect anything else…

There was a report out yesterday that said milk prices are expected to fall this year and next. The only thing is, the reason they give just do not make a whole lot of sense.

The USDA, in its survey of 30 cities spread across the country, reported an average price in August of $3.87 per gallon of whole milk, an increase of 1.8 % over July’s $3.80. So, what reasons are bring given for the upcoming decline?

Feed

After a rapid rise this year in cattle feed cost due to the cost of corn because of ethanol production, this cost is expected to level out and then begin to ease later this year and next. Why? The demand for corn for ethanol is still increasing and even this year’s crop (the largest in 50 years) did not cause corn prices to fall very much. What would happen if next years crop was a bust? Even if next years crop is just ok, with the built in demand for corn, prices would explode. We just had record corn prices this year and everything went perfectly for the farmers of it. We should not expect these conditions to be the norm. We know that ethanol mandates are going to be increased this fall when congress gets back together so we can bank on an increase in demand from that industry.

Supply

With high prices this year, dairy farmers are working overtime to take advantage of the market and large supply is coming on line. We also have had reports of demand destruction because of the high price currently. If this record supply comes on line and drives down prices, we will see demand pick back up and that should take up slack in the system that would prices down.

Not much is being said about the increasing demand for “organic milk”. Consumers want the product and as more dairy farmers switch to producing an organic product, that in and of itself will decrease the supply of regular milk, driving up the price for it to consumers. The irony here is that this very scenario may cause a decrease in organic milk prices that in most places exceed $5 a gallon.

In short, I think any prediction of milk price significantly receding from the historically high levels are more “hope” than an economically sound argument. When you have a record crop in the main item responsible for the increase (corn) produced under perfect conditions, you must assume some disruption in that paradigm next year. If you are at record high prices under perfect conditions, you must entertain the notion or not a price decrease but an increase if those condition deteriorate.

Recently companies like Starbucks (SBUX), Kraft (KFT) and JM Smucker (SJM) reported earnings and all said raising dairy costs were affecting earnings. I would be extremely hesitant to take any prediction of a price decrease to heart and even more hesitant to make an investing decision on it.

Just too many variables that depend on mother nature..