Editor's note: This note by Hedgeye managing director Howard Penney adding Starbucks (SBUX) to the Hedgeye Best Ideas list as a short was originally published September 11, 2014 at 16:49. The world’s biggest coffee-shop chain posted quarterly revenue after the close yesterday that missed estimates sending shares lower approximately -3% today.
We are adding SBUX to the Hedgeye Best Ideas list as a short.
We are hosting a Black Book call next Thursday, September 18, 2014 at 11am EST to run through our thesis and field questions. We will send out dial-in information and materials for the call next week.
SBUX: The Seven-Year Itch
It’s been seven years since Howard Schultz penned his now famous memo to management and employees, outlining where the company had gone wrong and what it needed to do to get back on track. It has also been six years since I turned positive on Starbucks – 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 leading us to believe that the street is overly optimistic about its future prospects.
I 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, I too have been following Howard Schultz and Starbucks for over 20 years. Unlike Ms. Koehn, however, I did not go to Harvard and I am not a HBS Professor. But I did release a Hedgeye Black Book in early 2009 detailing why I believed Starbucks was a great company and the stock was a great buy.
Today, while Starbucks is still a great company with a strong management team, the stock is far less attractive. More specifically, and perhaps to the heart of the topic, I believe the company’s domestic business is maturing and management is rapidly attempting to stem this decline by deviating from its core. Let us not forget that sentiment is near an all-time high. To me, this HBS Case is simply another example of a Starbucks “top.”
Our call on SBUX will focus on:
- Menu trends suggest increased complexity and slower throughput
- Decelerating same-store sales and traffic
- Rapid diversification away from the core business
- Proprietary Hedgeye survey confirming new menu initiatives are not resonating with consumers
- Significant and sustainable increase in coffee costs
- Peak margins
- Street optimism and overconfidence