We are removing Starbucks (SBUX) from the Hedgeye Restaurants Best Ideas list as a SHORT.

HEDGEYE OPINION

Our SBUX short thesis was pinned on three core factors, one, food sales growth would continue to slow; two, management changes are a cause for concern; and three, overall expectations were elevated for the enterprise.  With SBUX having missed same-store sales estimates for the past three quarters and the company reporting declining traffic last quarter, sales expectations are now muted.  Additionally, it was just two years ago at SBUX’s last analyst day where Cliff Burrows stated food sales would reach 25% of sales by 2019. And then yesterday Kevin Johnson, the new CEO, stated food sales would not grow to 25% until 2021. We predicted that this goal would be kicked down the road, and in fact we still think that it will be hard to reach.

Management changes were also a concern, and that appears to be less of a concern at this point, but I remain skeptical that a” technology guy” is the right person for the CEO spot. Howard Schultz is one of the best CEO’s out there, so anyone taking his place is not going to be as impressive, but we believe Kevin Johnson will do just fine for now.

At this point, the short has played out and we are going to remove SBUX from the SHORT list.

THOUGHTS ON THE INVESTOR DAY

At an Investor Day filled with laughs, and probably a few tears, SBUX executives showed why many people consider their company to be one of the best on the Street. Management inundated viewers with anecdotes and videos, and provided those in the audience with coffee and tea samples throughout the day. At the center of the presentation was the Company’s aggressive digital innovation (some of which was very impressive), optimism surrounding the aggressive growth of their China business, and the development and opening of their upcoming Roasteries and Reserve Stores, which includes a partnership with Italian artisan bakery, Princi. According to early projections, SBUX believes there is an opportunity to build 20-30 roasteries around the world, each of which will be twice the size of the Seattle roastery and 2x the AUV of the standard Starbucks location. So, needless to say, there was quite a bit of excitement surrounding these new Roastery and Reserve Stores throughout the day. In addition, the company announced a new five-year strategic plan to grow revenue by 10%, EPS by 15%-20%, and drive mid-single digit comp growth each year, with hopes to open 12,000 new stores globally by 2021.

CEO Howard Schultz started the day by saying, “If Starbucks was a 20 chapter book, we’re still in chapter 4 or 5.” He used this analogy as a way to say that to him, SBUX still has much room to grow and mature. However, this analogy can also be used to buttress our argument, as we believe that only time will tell how things will shake out for the Company with regard to the food side of their business. At their 2014 investor day, management stated that food would grow to 25% of sales by 2019. But today, they were singing a different tune, as now they have extended that timeline, stating that food would hit the 25% benchmark by 2021. We wholeheartedly still feel that food is a distraction that does not add adequate value to the customer experience, and that expectation for the potential for food needs to be scaled back.

SBUX | STRATEGIC HURDLES REMAIN, BUT CLOSING OUT THE SHORT - Chart 1

SBUX | STRATEGIC HURDLES REMAIN, BUT CLOSING OUT THE SHORT - Chart 2

SBUX | STRATEGIC HURDLES REMAIN, BUT CLOSING OUT THE SHORT - Chart 3

Please call or e-mail with any questions. 

Howard Penney

Managing Director

Shayne Laidlaw

Analyst