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Starbucks' Less Caffeinated Growth

By Alyce Lomax – Updated Apr 5, 2017 at 5:05PM

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Can Starbucks regain its identity?

Alas, poor Starbucks (NASDAQ:SBUX). I knew it well, Horatio. (Hey, wait -- I don't know anybody named Horatio.)

OK, enough tragedy -- Starbucks isn't merely a grinning skull illustrating our inevitable death and decay (even though investors are leaning in that direction, judging by the stock's drop today), but it's definitely taken on a new countenance lately.

And this isn't the first time I've asked whether Starbucks has changed. A 3% to 5% comps growth goal? Trimming next year's guidance? Experiencing sluggish U.S. customer traffic? Planning a national TV ad campaign? I used to know you, Starbucks, but have you ever changed.

What company is this again?
OK, a 35% increase in quarterly net income isn't a bad showing -- that's a figure many retailers would envy, especially companies with a long track record like Starbucks. Revenues increased 22% to $2.1 billion, and same-store sales increased 4% (at the low end of Starbucks' usual guidance for comps increases of 3% to 7%).

Of course, Starbucks' quarter only met analysts' expectations; it didn't exceed them. And Starbucks embarked on some shocking activities that make it less than invincible -- it trimmed its guidance for 2008 and called for investors to expect only a 3% to 5% increase in comps.

It's not so bad, but it's not the same-old, same-old Starbucks with amazing growth that was boringly predictable. Remember when it usually exceeded its comps goals with breezy ease?

In another shocking move -- in my book, anyway -- Starbucks said it plans a national TV ad campaign. One of the things I liked about Starbucks was its ability to manage incredible growth without falling back on traditional advertising methods to get the word out. What are you? McDonald's (NYSE:MCD)? Gap (NYSE:GPS)?

In this day and age, TV advertising seems old-school and ineffective, and many big companies are resorting to methods like Internet advertising and viral marketing to get the word out. It makes me wonder whom Starbucks is setting out to woo -- people who live under rocks?

After all, who doesn't know Starbucks? The company said the ad campaign will illustrate how the company is differentiated from the competition, but in this lowly shareholder's opinion, it sounds like it could end up being a waste of good money to me. 

A cup of catastrophe -- or opportunity?
Starbucks is clearly in the winter of its discontent (same Shakespeare, different play) these days. It's been hard for this stock to get any positive sentiment whatever, given a year or so of rising costs, supposed loss of soul, and unusual events (like trimming guidance).

Of course, there have been tough times in coffee slinging these days. Surprisingly, Peet's (NASDAQ:PEET) brewed a strong quarter of growth recently, but it's had its fair share of cost-fighting troubles. Look back over the years and Caribou (NASDAQ:CBOU) seems to have a problem expanding its business in a profitable manner, and its CEO just stepped down this past week.

Green Mountain Coffee Roasters (NASDAQ:GMCR) was on a roll this year, reminding people of the old Starbucks -- but this week earnings results disappointed investors. Even though its net income increased 133% and sales increased 39%, results missed analysts' expectations, and the stock fell on the news. (It's still looking pretty darn pricey with a price-to-earnings ratio of 70 and a PEG ratio of 2.35.)

It's tempting to throw Starbucks out with the bathwater. But even though many of the new developments don't please me as a shareholder, I'm willing to stick this one out. It's also tempting to think Howard Schultz and the rest of the executives are asleep at the wheel, but Starbucks is a well-run company with plenty of room for growth, particularly abroad.

I'm not convinced Starbucks' problems are unfixable. We may have a rocky near term in store, but I know Starbucks can get things back on track -- we just have to be patient.

This stock has ventured into territory many of us could not have imagined a couple of years ago: reasonable price. Not that long ago its P/E ratio averaged in the 40s. For some value-minded investors, the current sentiment probably represents the moment they've been waiting for -- if they're willing to take a long-term view.

More Foolishness to sip on:

Starbucks is aMotley Fool Stock Advisor recommendation, as is Gap. Gap has also been recommended byMotley Fool Inside Value.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.

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Starbucks Corporation Stock Quote
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$84.26 (-2.67%) $-2.31
McDonald's Corporation Stock Quote
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