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Considering last night’s news that COO Troy Alstead is taking a “coffee break” from the company, we are inclined to believe there is more to the story than Starbucks is willing to tell.  The general sentiment in the investment community seems to be that the move doesn’t “feel” right – a sentiment we share.  Yesterday morning we firmly believed Troy was next in-line for the CEO position and, now, we’re left with little more than questions and skepticism.

Whether it played a direct role in Troy’s departure or not, the company has taken a big bet on food and it doesn’t seem to be working.  With this in mind, we decided to re-run our consumer survey focused on the food at Starbucks – and the results revealed a noticeably unfavorable trend.  Knowing this, along with the recent timeline of events below, we continue to have sound conviction in our short thesis.  

Starbucks/Hedgeye Timeline

September 2014: Hedgeye adds Starbucks to the Best Ideas list as a short.  The core of the thesis is predicated on rapidly decelerating traffic – the new food is not resonating with consumers and is leading to increased menu and operational complexity.

October 2014: Starbucks misses 4Q14 EPS and guides down FY15 estimates.  Traffic trends are a serious red flag for analysts, but management insists any concerns are unfounded.

December 2014: COO Troy Alstead plays a major role at Starbucks analyst day and is clearly positioned as the heir apparent to the CEO role.  Food is a major topic of discussion and is framed as one of the keys to the future of the company.

December 2014: Hedgeye’s channel checks indicate that holiday promotions are not being as effective as planned.

January 2015: The Street begins to lower 1Q15 same-store sales and traffic estimates.

January 2015: Starbucks hires a new VP of Food.  The Street begins to wonder why it has taken this long to hire a culinary person given the company’s food ambitions.  Furthermore, it’s unclear what happened to the two executives that presented at the analyst conference.

January 2015: Starbucks announces that COO Troy Alstead is taking an “unpaid coffee break” to “spend time with his family.”  Given Troy’s role at the recent analyst meeting, his rash unpaid leave is taken with significant skepticism.

Updated Consumer Survey

Last September, we ran a consumer survey in which we gathered over 1,500 responses and learned that the overwhelming majority of Starbucks customers that participated were not in favor of the company's new food offerings.

We recently re-ran this survey in order to gauge any swing in sentiment one way or the other.  The results were quite telling:

  • Importantly, people are noticing a difference in the food as awareness ticked up 480 bps
  • The percentage of respondents that answered “No” increased 860 bps from September
  • The percentage of respondents that answered “Yes” decreased 190 bps from September

SBUX: Part of the Story is Going Untold - 1 9 2015 10 39 22 AM