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EYE on commodities - Milk prices

For the month of May, milk prices increased for producers. The USDA reported the base Class III price for May is $18.18, up $1.42 from April and 58 cents above a year ago. Seasonally, milk prices tend to head higher this time of year.

Nearly everybody is impacted by higher milk prices, but CAKE and SBUX stand out!

SBUX - International growth may not come easy everywhere.

SBUX - International growth may not come easy everywhere. As I said once before, SBUX is facing difficulties in France, proven by the fact that the company has appointed its third managing director for France in four years. Although SBUX opened its first store in France back in 2004, it has since opened only 41 stores relative to the company's rapid growth in the U.K. where the company has opened over 650 stores since 1998. Some attribute France's slow acceptance of the brand to the fact that the country already had an existing coffee culture, which is dominated by traditional cafes.
  • An article from Western Europe Food and Drinks Insights points out that French per capita consumption of coffee is among the highest in the world so that it would benefit SBUX greatly if it can make even the slightest inroad into the French coffee market. However, this might come with great difficulty as the article highlights that Starbuck's French operators are yet to breakeven.
  • Starbucks opened its first store in Argentina on May 30. Although the company already operates in neighboring Brazil and Chile, SBUX was slow to enter Argentina due to the country's close links to espresso-style coffee and cafe culture, which have long been part of life there. Another Western Europe Food and Drinks Insights article said that the president of Starbucks Latin America has commented that the local coffeehouse culture in Argentina is the strongest of any Latin America country and because of this the company felt it would be a difficult market to be successful in.
  • The opening in Argentina fits in with the company's renewed focus on International expansion and suggests that the company may try to push into markets that it had previously ruled out in order to offset weakness in the U.S. The company may face similar issues to that of France as it will be more difficult for SBUX to steal customers away from their independent cafes. The steady grow in Argentina coffee sales is tempting, but I hope SBUX pursues only high-return international growth and does not expand just for the sake of growth as it once did in the U.S.

Most Dominant Franchise In The World?

Nike, Inc's basketball franchise recently topped 90% share of the category. I'm struggling to find any franchise in any consumer industry in the world that is as dominant, but I come up dry.

In answer to the question How high can your market share go? Phil Knight was in print years ago with the answer 100% . In pouring through the share statistics on my previous post about the state of share change in the industry, I was reminded how simply dominant Nike's basketball franchise is, and how prophetic that seemingly impossible statement turned out to be.

Here's an amazing statistic for you. Adding up market share in basketball for the Nike Brand, Brand Jordan, and Converse, Nike Inc owns 92% of the category. If you ex out basketball shoes under $80, Nike's share goes to about 98%. I don't know about anyone else out there, but I cannot think of any consumer product in any category in any part of the globe that commands this kind of share. (Shoot me an email if you think of one).

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%

Positive Call Out for Athletic Theme

I'm still convinced that the athletic channel is increasingly clean. I'm not a 'fashion guy' by any means, but I like to go through all the online sites pretty religiously - more often than not I learn something. I was struck by something on the Famous Footwear website.
  • Based on my math, there are 917 styles on sale in the 'clearance' section. That's not unusual. But the fact that I had to count past 304 dress shoes to even get to the first sneaker was noteworthy.
  • In fact, Famous' traditional product mix is 43% athletic, but less than 20% of its online 'clearance' inventory appears to be athletic. That's music to my ears if I am long anything in the Athletic arena.
  • Yes, I know that these little anecdotes are dangerous given sample size, and lack of depth into number of pairs backing each advertized style. But when anything 'fashion' or 'style'-related hits my fairly unsophisticated eyes, I think it's usually worth calling out.

Does a 20% Cost Increase For CROX Matter?

While most of the free world has never heard of the Rocky Mountain News, it has proven to be just about the most reliable general news organization on Crocs (through the Colorado angle). Earlier today, the RMN noted that Crocs is believed to rely on a DOW product that is about to implement a 20% price increase. While Crocs is very 'hush hush' about the secret formula for its Croslite material, the RMN noted that a patent issued in 2006 shows a polymer called Engage - sold by DOW - as a key ingredient.

Quite frankly, out of any footwear company in the industry, I'm least concerned about Crocs' cost pressures given that a stabilization of revenue will do more than any input cost increase. Also, I'm in the camp that the juice on the SG&A and capital intensity side of this model can more than offset any resin pressure.

No, I'm not making a bull call here. Not yet at least. But with the stock near $10 it's on my list.


SBUX - Comments from the Goldman Conference

Coffee war commentary continues - SBUX's CFO Peter Bocian cited the company's current market share: 13%-14% of the brewed coffee market and just north of 50% market share of espresso-based beverages consumed out of the home. When MCD introduced its premium roast coffee in 2006, it received a lot of media attention and SBUX was often named as the company which would be hurt the most from a competitive standpoint. Now, with MCD expanding its coffee lineup to include specialty coffees (espresso-based lattes and cappuccinos), the media is again calling SBUX out as the biggest potential loser. Even before hearing SBUX's respective market share numbers quantified today, I was skeptical that MCD's specialty coffee introduction would substantially impact SBUX's performance going forward. In 2006, MCD entered a market where the market leader had a 13%-14% share position. Today, MCD is trying to tackle a market where the market leader holds more than a 50% share position. I think the numbers speak for themselves, but I can't help adding that the McDonald's product offering is very different from what Starbuck's serves.

More U.S. store closures on the horizon? - Starbucks said back on January 7, 2008 that it would close a number of underperforming U.S. stores as part of its turnaround strategy. The company quantified that number on January 30, 2008, saying it would close around 100 underperforming stores. Today, the company gave its first hint that the 100 number could be going higher when the CFO said he has a watch list for potential stores that may be on the bubble to close. Closing additional stores (beyond the already stated 100 stores) will only accelerate the company's ability to improve store-level operations and U.S. operating margins and will, more immediately, benefit same-store sales.

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