SBUX: Wake Up And Smell The Coffee

Starbucks (SBUX) put up a disappointing quarter for Q3FY12 yesterday, sending the stock down double digits as of this morning on the open. Simply put, the company is feeling the effects of soft economic trends, increased expenses, and the pressure of trying to run five different concepts at once: Starbucks, Seattle’s Best, Tazo Tea, La Boulange, and Evolution Fresh.


We have been long Starbucks in the Hedgeye Virtual Portfolio since April 2009, when we bought it at $11.52 a share (timestamped for the record, of course). We will continue to hold it because we did two things right: we got SBUX at the right time and at the right price. Even with this pullback, this is not the right entry point for getting long Starbucks. Our Managing Director of Restaurants, Howard Penney, is sticking to his guns and advising to stay on the sidelines for now.


The macro environment isn’t helping anyone in the restaurant business at the moment. Company-specific problems aside, inflation has driven food and fuel prices up to high levels thanks to the Federal Reserve’s policy of quantitative easing.


SBUX: Wake Up And Smell The Coffee - SBUX liesahead


As we stated back in June, the $100 million acquisition of La Boulange will take time to integrate into the business. It will also dilute Starbucks’ EPS a few cents a share for the next few quarters. We believe management needs to lower expectations for the back half of 2012. Margins will improve as commodity costs come down over time.


Internationally, Europe is a mess for Starbucks and is largely out of the company’s hands. We’ve all read the headlines about the situation in the Eurozone. It’s understandable that Spaniards aren’t running out to buy Venti frappuccinos with 25% unemployment plaguing the country. Over time, a European turnaround is quite possible as long as management continues to operate competitively and efficiently.


SBUX: Wake Up And Smell The Coffee - SBUX AmericaSSS


In China, the goal is to have 1500 stores opened by 2015. Despite the macroeconomic picture being painted in China (growth slowing), there’s a lot of excitement around the push the company is making there. Starbucks has challenges it must face over the next year. If it can overcome them, there’s plenty of room to grow.

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