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Five Reasons to Sell SBUX
As bullish as I am on Sirius
XM stock, I despise Starbucks (SBUX). I advise avoiding
the king of expensive coffee for multiple reasons.And if you already own SBUX, you’d be smart to sell before it’s too late. You would have good reason, as you’d be locking in profits.
The stock has rocketed up some 65% since early March.SBUX is a complete mess and should no longer be viewed as a darling entrepreneurial growth story. Such is the danger of being a
one trick pony. Once the trick ends, the company never is able to recapture the magic.Investors, though, tend to be optimists. They fall in love with the story and so they’re more willing to forgive and forget — “You
can do it again SBUX, I just know it!”Um, that would be a big “no.” SBUX cannot do it, and if you’re smart, you will sell this stock now before it’s too late.
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Despite Earnings, Growth Will Not Return
The good news is you will be locking in profits. The stock has rocketed up some 65% since early March. As I said, hope springs eternal
with the ever-believers.In the case of SBUX, investors have been in a very forgiving mood. Hopes of a stronger economy and a stronger
consumer mean a return to expensive beanery, right?Nope. Wrong.
The luster is gone, my friends, and the days of wasting money on a perception may be gone for good.
You might have more luck watching grass grow than hoping growth will return at SBUX.
On Wednesday, the company announced results that should give any investor pause. Earnings for the quarter beat estimates by the proverbial penny but revenues missed expectations. Same store sales were down 8%, and the average ticket order was down 3%.
Customers are fewer, and the ones that do make it into the store are spending less. That is a continuation of a negative trend that will likely continue.
Here are five reasons why you should sell SBUX…
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Reason #1 to Sell SBUX:
The World Has ChangedIf you listen to President Obama closely, he is leading the country with rhetoric of change. Ever so subtly the implication is that
the days of excess are over. What says excess more than an overpriced dried and ground coffee bean filtered through hot water, garnished
with steamed milk and served up at a cost of over $3 a pop?SBUX turned that joke of the ‘half-caf decaf with a twist of lemon” into a national craze. But that was before the world
changed. To think that when the economy recovers consumers will return to SBUX in volume is a mistake. It’s not going to happen.As a result, sales volume at SBUX is likely to suffer until it can be replaced. That’s the problem with being a one trick pony,
a replacement is not easily found.
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Reason #2 to Sell SBUX:
The Market is SaturatedSo Starbucks is closing stores to reduce the dreaded saturation that was cannibalizing sales, right?
Wrong.
The company is shuttering locations in a drastic race to avoid total collapse by quietly seeking to expand its Seattle’s Best Coffee
brand. Did this company not learn anything? Saturating a market does not work. Changing the name only complicates matters. The move
is certainly sneaky but likely to fail in the long term.There are simply too many coffee shops and not enough customers. The attempt is admirable but not a reason to own the stock.
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Reason #3 to Sell SBUX:
CompetitionThe problem with saturation goes well beyond SBUX. There are way too many coffee shops in the world, and the problem is not likely
to resolve easily. Companies will fight like cats and dogs to survive, and that means closings are likely to be forced rather than
voluntary. In other words, the fight will be to the death with a judge deciding which stores stay open and which stores close.While I do not expect SBUX to lose the battle, the carnage will do damage to its core business. What’s left in the wake will be
a smaller business model that may generate nice cash flows but is sorely lacking on the growth front.Fierce competition should be
avoided by all investors.
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Reason #4 to Sell SBUX:
Arrogant ManagementEveryone is in love with Howard Schultz — including himself. I can understand the admiration. Building a business on perceived quality
and premium prices was business genius. But is the model long-lasting?To assume that his effort to build the company can translate into a vision of perpetual double-digit growth is wishful thinking
at best and dangerous at worst. The skills necessary to build versus sustain are incredibly different. One cannot, and should not,
compare Schultz to Steve Jobs at Apple. Jobs has proven over a long period of time to be an innovator.I’m sorry, but there is simply no place for innovation with coffee. I just don’t see it. That means SBUX is in a box both literally
and figuratively. The best investors can hope for is a lean, mean fighting machine that steals market space and can figure out how
to eke out single-digit growth in the future.I see SBUX as a dividend stock,
not a growth stock. That is its future!
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Reason #5 to Sell SBUX:
Food Will Not WorkStarbucks’ management is convinced that food will be the source of growth. Dream on. What are they going to do — offer premium edibles
at premium prices in devotion to its mission?Well I for one am not buying it. I’ll make my coffee at home and carry it in a thermos. If I spend my hard-earned discretionary
income on a food item, I want to go to a place that knows food. Putting it on the shelf does not mean quality follows. It may not
be all bad, but I would rather get my bagel at a bagel shop.Case in point is their failed attempt at healthy smoothies in the food section. It was an attempt to perk up the summer season (when casual coffee drinking drops off) and go after the health market. They made a big deal about the smoothies being high fiber — and unfortunately they tasted like it because they used powdered fiber instead of the real thing from real fruit.
It was a case of foraying beyond what they knew best and failing miserably. And their value menu idea is even worse for the brand. A bit like Tiffany trying to get into Wal-Mart’s business. I mean, this is a company that built its business on charging three times more than necessary on coffee — it’s about premium and luxury, and now they’re selling food in the style of Mickey D’s? What’s next? Asking if you want fries with that?
I think you get my point. Food is not the growth driver that management is making it out to be.
For more stocks to sell, check out my Top
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