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Starbucks: Serving a Venti Cup of Desperation

Why the coffee company's lack of focus should worry investors

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Starbucks (NASDAQ:SBUX) is one of the biggest comeback stories since the financial crisis. After bottoming out just north of $8 a share in spring 2009, shares of SBUX stock are now up over 530% to over $53. That’s right in step with growth darling Apple (NASDAQ:AAPL), and over seven times better than the Dow Jones Industrial Average.

But if you ask me, this stock is about to melt into a soupy mess faster than a Frappuccino in the Florida sun.

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Looking at the facts behind this stock right now, there are a lot of reasons to be skeptical:

  • The frothy forward P/E of 23 should give investors a pause.
  • Despite strong headline earnings in the first quarter, the company revealed margins were slipping and the stock took a hit.
  • SBUX sold off again after Q2 earnings in April beat expectations by only a penny and the report revealed disappointing same-store sales.
  • As this chart shows, the recent sell-off in Starbucks has pushed the chart below its 50-day moving average –- which is turning downwards as the stock fails to challenge previous levels.

These are all bad signs. But my biggest reason to be bearish on Starbucks isn’t any of this; it’s recent moves that show a lack of strategy and a lack of focus, highlighted by head-scratching acquisitions and downright absurd product launches.

Take a look:

Dumb Starbucks Move #1: Vending Machines

I am not making this up. Starbucks just inked a deal with Coinstar (NASDAQ:CSTR), the company behind RedBox DVD kiosks and those coin-collecting gadgets at grocery stores, to serve up coffee at big box retailers, drug stores and grocers nationwide.

The five-year deal will kick off with 500 machines installed by the end of 2012, boasting the lower-priced Seattle’s Best brand from the SBUX portfolio of products. The java will start at $1 a cup.

Um, hello? There is already a Starbucks in my Safeway (NYSE:SWY), my Target (NYSE:TGT) and even one in the strip mall between my Safeway and Target. Besides, anyone who has ever worked in a joyless office with a clunky coin-op coffee maker in the cafeteria has rather unpleasant memories of the java that is spewed out of a vending machine. Getting consumers to take that leap involves overcoming some serious preconceived notions about vending machines. (Read more about the absurd vending machine deal here.)

Dumb Starbucks Move #2: Bakery Buyout

Starbucks just made waves by buying the San Francisco’s Bay Bread bakery for $100 million. And stock rightly sold off immediately afterwards as a result.

Apologies to my colleague Will Ashworth, who is bullish on the deal, but this is just plain silly. For instance, wrap your head around this quote by CEO Howard Schultz in a press release:

“This is an investment in our core business. After more than 40 years, we will be able to say that we are bakers too.”

In what alternate universe does your core business involve something you haven’t done in the 40 year history of your company?

The squints at Starbucks are clearly looking at numbers but not reality. Yes, about $1.5 billion or 10% of SBUX revenue comes from food. Yes, food sales have seen double-digit increases the last two years. There is admittedly more upside here, too.

But Starbucks execs are deluding themselves if they think they can easily become a Dunkin’ Donuts (NASDAQ:DNKN) where the food is as big a driver of traffic as drinks. And SBUX is also foolish to think that the move by McDonald’s (NYSE:MCD) and other restaurants into premium beverages is a two-way street, where a drinks giant can easily stake out a claim on the lunch crowd the same way McCafé snapped up folks looking for a caffeine fix.

Article printed from InvestorPlace Media,

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