More Grounds for Pessimism at Starbucks

Starbucks (Nasdaq: SBUX  ) is remarkably consistent in its inconsistencies. For a long time, the company could do no wrong -- performance was always amazing, to the point of being boring. Now, whenever you turn around, there's some piece of amazingly unpleasant news coming from the java giant, and if there's a word for what we're seeing, it's certainly not boring

Coffee withdrawal
The latest tidbit of gloom came in the form of Starbucks' revised outlook. Starbucks said it now expects second-quarter earnings to come in at $0.15 per share, versus $0.19 per share in the same period last year, and for revenue to increase by 12%.

Even more shocking, Starbucks said earnings for all of 2008 are now expected to be "somewhat lower" than the $0.87 per share the company reported last year.

Not surprisingly, Starbucks cited the U.S. economic downturn for its troubles. Returning hero Howard Schultz said that "lower home values and rising costs for energy, food, and other products" have made this the weakest climate in the company's history. The company also carefully broke out the significant percentage of revenue that emanates from the California and Florida markets (32%), which are both notoriously beleaguered by the housing bubble's bust. (California's gas prices are notoriously sky-high, to boot.)

Tempting as it is to point to the new competition emanating from McDonald's (NYSE: MCD  ) and its premium coffee offerings -- not to mention the restaurant chain's agreement with Green Mountain Coffee Roasters (Nasdaq: GMCR  ) to provide premium java in some markets -- Starbucks said its loss of customer traffic isn't about losing to competition.

Maybe American consumers have finally started doing the math on how much they can save by skipping the daily joe. Maybe the expenditure just isn't worth it anymore, with the cost of food and gas boring holes in their pocketbooks. And if that's the case, it wouldn't bode well for rivals such as Peet's (Nasdaq: PEET  ) and Caribou (Nasdaq: CBOU  ) , either.

Slow-drip coffee
I asked last quarter whether Starbucks really stinks. And let's face it -- this latest release doesn't exactly smell like a fine roast, either. On a macroeconomic level, this news seems to underline just how badly the consumer is hurting. After all, Starbucks weathered the last recession just fine. Of course, you can argue that the last recession didn't affect such a large population of U.S. consumers. The housing market, bubbly as it may have been, did help bolster consumer spending. What's more, Starbucks' store base was significantly smaller back then.

I've long believed that during recessionary times, investors should avoid companies that have been long-standing turnarounds. Sure enough, Starbucks' slowdown is getting a bit long in the tooth. A recent glance at its chart showed me that its share price began falling off a cliff in late 2006, fairly soon after it decided to stop reporting same-store sales on a monthly basis.

However, while I recently called out Gap (NYSE: GPS  ) and Talbots (NYSE: TLB  ) as retail stocks to avoid, I'm not there yet with Starbucks. I still don't believe that its brand is busted.

Still, as a shareholder, I'm not thrilled by the news, although I also feel compelled to acknowledge that while Howard Schultz's return seemed like a good sign to many of us, it was by no means meant to be an instant magic bullet. Last night's tidings, and the stock's subsequent plunge, remind us that as painful as it is, we may have to be patient while the company maps out what us shareholders hope will be a dramatic return for Starbucks. (And if I'm willing to patiently hold a company that I believe is a solid one, maybe that's just because I invest like a girl. Well I am one, after all.)

I realize that it's kind of hard to be patient when the coffee's left you with jangled nerves. Although I still believe the long term will contain plenty of caffeinated goodness from Starbucks, I suspect that the near-term pressures sure will make it tempting to switch to decaf.

Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 629515, ~/Articles/ArticleHandler.aspx, 10/24/2016 6:20:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 4:00 PM
SBUX $54.18 Up +0.55 +1.03%
Starbucks CAPS Rating: ****
CBOU.DL $0.00 Down +0.00 +0.00%
Caribou Coffee Com… CAPS Rating: ***
GMCR.DL $0.00 Down +0.00 +0.00%
Keurig Green Mount… CAPS Rating: **
GPS $26.55 Up +0.14 +0.53%
Gap CAPS Rating: **
MCD $113.57 Down -0.36 -0.32%
McDonald's CAPS Rating: ***
PEET.DL $0.00 Down +0.00 +0.00%
Peet's Coffee & Te… CAPS Rating: *
TLB.DL $0.00 Down +0.00 +0.00%
The Talbots, Inc. CAPS Rating: *