Editor's note: The following excerpt below is the introduction to Hedgeye restaurants sector head Howard Penney's new 80-page slide deck detailing his short thesis on Starbucks. After five years of being one of the street's biggest bulls on SBUX, Penney now thinks "the stock is far less attractive." For more information on Penney's research please ping firstname.lastname@example.org.
It’s been seven years since Howard Schultz penned his now famous memo to Starbucks’ management and employees, outlining where the company had gone wrong and what it needed to do to get back on track, and it’s been six years since we first turned positive on the stock.
But nothing lasts forever. McDonald’s went on an eight-year corporate revival before it lost its luster and we fear Starbucks is nearing the end as well. In this presentation, we will outline a number of concerns we have with the company which makes us believe the street is too optimistic about its future prospects.
We recently read that Harvard Business School Professor and Historian Nancy Koehn has studied Starbucks and its leader, Howard Schultz, for nearly 20 years. She recently released a new HBS Case Study, “Starbucks Coffee Company: Transformation and Renewal,” which traces “the dramatic arc of the company’s past seven-plus years – a period that saw Starbucks teeter on the brink of insolvency, dig deep to renew its sense of purpose and direction, and launch itself in new, untested arenas that define the company as it exists today.”
While all of this may be true, we too have been following Howard Schultz and Starbucks for over 20 years. Unlike Ms. Koehn, however, we did not go to Harvard and we’re not HBS Professors. But we did release a Hedgeye Black Book in early 2009 detailing why we believed Starbucks was a great company and the stock was a great buy.
Today, while Starbucks is still a great company with an enviable management team, the stock is far less attractive. More specifically, and perhaps to the heart of the topic, we believe the company’s domestic business is maturing and management is attempting to stem this decline by rapidly deviating from its core. With sentiment near an all-time high, this HBS Case Study merely seems like another example of a Starbucks “top.”