Did Starbucks Just Supernova?

At one point in last night's after-hours trading, Starbucks' (Nasdaq: SBUX  ) shares spiked on word that the company will be closing stores and cutting jobs. I guess maybe in the harsh morning light, maybe even while standing in line for a latte, many investors realized, "Hey, what about my barista?" The euphoria has died down a bit today.

Starbucks plans to shutter 600 stores ( including previously announced 100 closures) and slash a whopping 12,000 positions here in the United States. This isn't entirely surprising -- downbeat news from Starbucks started circulating earlier this year, when I observed that the coffee giant cutting jobs was like something from Bizarro World. Of course, the fact that it doesn't seem so "bizarre" anymore isn't exactly heartening.

Of course, sometimes the truth hurts, and sometimes the only way to make things better is to recognize the serious problems and get to work doing something about them. And that sounds like what Starbucks is doing at the moment.

Mapping the retreat
In Starbucks' press release, it said that it will try to place some of the affected baristas into other jobs at other stores, but obviously it will still have to say "so long" to many of them. The stores that are marked for shuttering are located across the U.S. market, and 70% of the locations were opened since fiscal 2006, which tells us what some had expected: The breakneck speed with which Starbucks was opening new stores over the last couple years really was too good to be true. (In fact, "too fast to be sane" might be a better description.)

Flash back to this November 2006 article, “Starbucks Keeps Sprouting,” which broke down fiscal 2006 store openings to six per day. It looks like that was a little much after all.

Starbucks also gave a little indication of the criteria it used to make the decisions on which stores to cut. It said that it targeted stores that aren't profitable at the store level, and are not expected to be in the foreseeable future (good!), and that it took the impact of current and anticipated economic trends into consideration as well (also good!).

Of course, this gives much more credibility to the idea that Starbucks way overexpanded. I recently asked Foolish readers whether they thought Starbucks is a fad (I got some great responses on both sides of the issue), and of course, bears have long been calling the company overexpanded in the States. Starbucks casting a critical eye on its U.S. growth and curtailing it is far better than putting its head in the proverbial sand and hoping things improve.

After all, you could accuse long-struggling Gap (NYSE: GPS  ) of not only overexpanding but also failing to take the necessary measures to get things back on track. We all know the malaise that retailer has suffered through, and it’s still contemplating slimming down store counts and square footage.

The good, the bad, and the ugly
As tough as this all is (I hope all my favorite baristas will be sticking around), I think these developments are good news for Starbucks shareholders over the long run. I still don't believe Starbucks' brand is busted, and a focus on keeping the most profitable stores and ditching underperformers seems like a smart move to me.

Of course, I'll bet competitors of all stripes, such as Peet's (Nasdaq: PEET  ) , Caribou (Nasdaq: CBOU  ) , McDonald's (NYSE: MCD  ) , Panera (Nasdaq: PNRA  ) , and mom-and-pop shops, really see this as joyous tidings. After all, if Starbucks makes a retreat in some markets, it might make their lives a bit easier.

This is also an example of a situation in which the "good" news actually means the near term is pretty bad -- and pretty ugly. It doesn't exactly shine a comforting light on the overall economy, which has already been shedding plenty of jobs. Even though many Starbucks workers are part-time employees, Starbucks is well-known for treating its workers well. Furthermore, now it's one less employment option for those who are looking for work or seeking ways to raise extra money for rising expenses. Ouch.

The coffee's still fresh
I've noticed my Foolish colleague Rick Munarriz has been among the adamant Starbucks bears, and even recently pointed to it as a good stock to throw away. Personally, though, I'm hanging on to my shares of Starbucks.

I can see the short term is going to be tough for Starbucks, much as it will be for many retailers, leading to some difficult decisions and changes in strategy. However, Starbucks has one of the greatest brands out there, sells high-quality products, and has a passionate and visionary corporate leader in Howard Schultz. Sure, there is plenty of bearishness out there on Starbucks, but I'm still willing to wait this one out -- and I believe the long term's still bright.

Panera Bread is a Motley Fool Hidden Gems Pay Dirt selection. Starbucks and Gap are Motley Fool Inside Value recommendations and Motley Fool Stock Advisor picks. The Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool's disclosure policy is good to the last drop.


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  • Report this Comment On July 02, 2008, at 5:48 PM, forwardxprogress wrote:

    Don't count on the store closings helping anybody but Starbucks. The only stores that are closing are stores with a close proximity to other Starbucks and are cannibalizing each other. The real estate team has been fired for their "work" thusfar. Stores are still opening in smart locations and -- get this -- the company is now buying the land that the stores are build on. Novel concept, huh? Finally, it seems the company are thinking much more than they are hoping.

  • Report this Comment On July 02, 2008, at 9:31 PM, mberan wrote:

    Now they're buying the land??? Geeezzzz where have they been? So they've been renting all these years? Alyce has been a long time Starbuck's pusher. Time to get off the caffenine. Why didn't they learn anything from McD's trials? They went through the same growth and look where it got them. They changed their growth model. But the key was they're serving FOOD, not coffee. It'll take another 5 years or more, if you're lucky to make money on this one. It's coffee. It's nothing else. Now with the economy, people don't have the extra for that overpriced latte. Coffee, or a gallon of gas? You'll see more closings in the next year.

  • Report this Comment On July 08, 2008, at 2:06 PM, peteralt2 wrote:

    Starbucks is doing the right thing..they strayed from their real estate program to try to keep up with growth..foolishly so they made grave mistakes in location selection. For coffee drinkers they still provide one of the best cups around and now their pricing doesn't look crazy compared to the fast food chains who have now moved their prices right up to Starbucks. Hmmm what would I rather have a nice cup of Burger King coffee for the same price as Starbucks. I think consumers will soon realize the competitor tricks and all will be well..

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