Starbucks Gets Creamed for Growing — and That Ain’t Right

by Marc Bastow | July 27, 2012 2:19 pm

Starbucks Gets Creamed for Growing — and That Ain’t Right

Have you gone into a Starbucks (NASDAQ:SBUX[1]) lately — for any other reason besides just trying to get a single cup of coffee?

Do you remember what they used to look like, the ambiance … you know — things you’d remember if you stuck around long enough to have a second cup?

Yeah, me neither. And apparently I am not alone, at least judging by the company’s latest quarterly results.

Starbucks posted figures that actually were pretty decent[2]. Earnings were up 19% to 43 cents per share on revenues that grew 13% to $3.3 billion. However, those figures still missed Wall Street expectations — something now akin to a “third rail” mistake — of 45 cents and $3.33 billion in revenue. Guidance for the fourth quarter also was dropped by about 2 cents per share to a range of 44 to 45 cents..

The result? The stock was being slashed by about 11% in early afternoon trading Friday, extending a 25% slide in SBUX shares since peaking at all-time highs above $61 in April.

Even though Starbucks didn’t miss targets by much and actually improved from the year-ago quarter, it still begs the question: Why the miss? And perhaps more important: Where the heck will SBUX go now?

Famously known as one of the first mass purveyors of coffee, Starbucks is a global brand that used to mean sitting in a location with a coffeehouse feel, alone with one’s thoughts (and maybe a laptop), sipping away on a strong brew while checking up on emails and friends, or chit-chatting with a friend in a cozy corner.

The ultimate coffee klatch, really.

Well, look around, my friends — this is not your older brother’s Starbucks.

The “brand” decided to expand exponentially across the country and into Europe and Asia. More importantly, it has adopted a different feel as the company has expanded its food and drink choices[3].

Start with a tie-in to Keurig owner Green Mountain Coffee Roasters (NASDAQ:GMCR[4]), add a touch of juice bar through the acquisition of Evolution Fresh[5], throw in a dash of energy drink mojo with Starbucks Refreshers[6], then bake up some treats through the LaBoulange bakery chain, and voila! — you have a company that appears to be trying to be all things to all people.

Some think the moves are brilliant.[7]

Some, like InvestorPlace Editor Jeff Reeves, well … not so much[8].

So, let’s look back at the numbers. First, we have to acknowledge that the global economy is in a slow-growth mode — especially in Europe, where Starbucks saw same-store sales growth flat-line in the past quarter. In fact, SBUX announced it will shutter an undisclosed number of stores across the pond.

The slowdown in the U.S. kept revenue growth in same-store sales to 6%, well below company expectations. Makes sense — from what I have seen lately, people are dialing up fewer Venti orders and opting for smaller lattes. If you really stop to notice, people are just turning back toward the door when lines are long. And at least in my neck of the woods, the stores seem to close earlier than I remember.

Starbucks appears to have kept the cost damage from new acquisitions and lines to help fuel growth to a minimum. However, cost of goods sold and SG&A expenses climbed quarter-over-quarter. Coffee and other commodity prices cut into the expense line, and of course adding new employees and some marketing can account for the selling cost increase.

So although the experience might not be the same, maybe the branching out at Starbucks will play out for Howard Schultz in the long run. After all, he can’t very well tell the board and shareholders that he has no plan for growth — so nostalgia be damned, this company will grow.

Indeed, according to Examiner.com, Starbucks plans to open an additional 1,200 stores next year[9], including nearly 600 more in the U.S. So even as the company scales back profit expectations for this year, it’s apparently confident those short lines will grow and demand will be there in the future. Pretty much what you want to hear if you’re in SBUX for the long haul.

Mull it over with a venti frap. You’ll have time. Starbucks isn’t going anywhere.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  2. actually were pretty decent: http://investorplace.com/2012/07/starbucks-misses-earnings-and-revenue-estimates/
  3. expanded its food and drink choices: http://investorplace.com/2012/03/starbucks-schultz-is-still-dreaming-big/
  4. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  5. through the acquisition of Evolution Fresh: http://investorplace.com/2012/03/starbucks-declares-war-on-jamba-juice/
  6. Starbucks Refreshers: http://investorplace.com/2012/07/starbucks-adds-refreshing-new-line-of-beverages/
  7. Some think the moves are brilliant.: http://investorplace.com/2012/06/starbucks-bakes-a-brilliant-move/
  8. not so much: http://investorplace.com/2012/06/starbucks-serving-a-venti-cup-of-desperation/
  9. plans to open an additional 1,200 stores next year: http://www.examiner.com/article/starbucks-earnings-rise-19-percent

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