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Judging by the stock's jump today, many investors enjoyed a serious espresso buzz after Starbucks (Nasdaq: SBUX ) reported a better-than-expected profit in its third quarter. But the java giant can't simply rest on its laurels if it wants to regain its luster.
Starbucks' net income came in at $151.5 million, or $0.20 per share. Analysts had expected earnings of $0.19 per share. Last year this time, Starbucks had reported a third-quarter loss of $6.7 million, or $0.01 per share, so the company is certainly moving in the right direction.
However, Starbucks' quarterly profit owed greatly to cost-cutting, since customer traffic was still lackluster. Sales fell 6.6%, to $2.40 billion, and same-store sales dropped by 5%. Starbucks' traffic trends improved from last quarter's 8% decline, but the 5% comps decrease it posted this time around remains far from inspiring.
The ugly economic environment is making life tough for Starbucks, even as champions of cheap such as McDonald's (NYSE: MCD ) and Wal-Mart Stores (NYSE: WMT ) thrive. The pricey coffee that seemed like an affordable luxury in better times is now easy for customers to slash from their daily expenditures.
Unfortunately, the customer-focused initiatives Starbucks has been testing to reverse this slump may risk tarnishing its brand, especially as it struggles to compete with McDonald's and more similar rivals Peet's Coffee and Tea (Nasdaq: PEET ) and Caribou Coffee (Nasdaq: CBOU ) . Starbucks, which historically never had to rely on advertising at all, has started print ad campaigns -- another reason to wonder whether the java giant has lost its sheen. At least Facebook still loves Starbucks; the company has the most popular brand page on the hot social networking site, according to The Wall Street Journal.
As a shareholder, I can't say I'm dismayed to see the stock up more than 17% the last time I checked. Still, investors might want to temper their caffeinated euphoria, especially when sales could still use a jolt. I'm still hanging on to the stock, but I can't underestimate the challenges the company faces. The frothy economic environment that helped Starbucks brew up so much of its previous success has been drained to its last dregs, and the company faces much grittier times ahead.
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