Starbucks: 2 Years of Missteps & An Overdue Admission.

25 Nov 5:30am
Posted by ToddSullivan
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Of course they slipped in an SEC filing and did not actually say it out loud. There have been few companies that I have covered that have been either as clueless as to their business environment or dishonest about it with shareholders than Starbucks (SBUX) had over the past almost two years now.

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Back in Feb. 2007 the CEO Jim Donald claimed that McDonalds (MCD) then new entry into premium coffee would be a benefit to Starbucks as McDonalds' customers would then trade up to him. At the time I detailed to folly of this statement and said "I advise any potential new shareholders to avoid shares...". Shares at $34

Less than a month later then retire founder and former CEO Howard Schultz penned a memo saying, without naming, that "competition has created awareness" of themselves, the company had "got away from its roots" and that it was affecting results.

In May 2007 with milk prices soaring and flimsy earnings out I detailed how dairy price would hurt them despite the fact management denied it would affect earnings and CEO Donald said "we do not consider the competition" when asked about McDonalds. Um....can't really even add to that...Shares sit at $28

Only weeks later Starbucks switched from whole milk to 2% in all drinks for "customer service" reasons and at the time I said it was all about milk prices, then at decade highs..(2% is cheaper than whole)

Fast forward a month, Starbucks issues a profit warning and says "rising dairy costs are a challenge".....duh..

Then came the announcement of the near $6 salad. At the time I commented that for a company that Schultz had lamented had "got way from its roots" in his famous memo, nothing they had done since then was a return to them.

Then just in case you weren't convinced the ship wasn't drifting listlessly, in late July facing declining stores traffic and an increasingly cash strapped consumer Starbucks did what???? Raised prices...

Less than a week later Starbucks admits increased prices leads to less store visits by customers....yet they maintain price levels...

Finally in September Starbucks admits "dairy prices will be a negative into 2008"...Shares now priced at $27

In Jan 2008 Schultz finally did what I begged him to do for almost a year a fired Donald

In Feb. 2008 they admitted what I hope anyone who has read the blog already knew, the coming year would be a poor one. Shares priced at $18

In March things got weird. Starbucks decided that they were going to start a social site so folks who loves the place can go online and talk about it.....more of Schultz "going back to the roots" of the company?

In May we find out the fired CEO Jim Donald cannot work "for the competition"....McDonalds..but, we thought they weren't??

In July Starbucks started playing games with the earnings release to hide how bad results really were. Shares priced at $14

In August Schultz gave an interview in which he called the coffee at McDonalds and Dunkin Donuts "swill", said he won't "dilute the brand" by "going down the fast food road" and then does just that only days later with the "$2 after 2" promotion. Shares priced at $14

Current day. I have stopped following Starbucks as close as before because with the stock at $9 vs the $34 it was at when I told folks to run from it, I hope the story is clear for all to see. But, I could not let this one go by.


From the WSJ:

The filing to the Securities and Exchange Commission sheds light on how much of a threat new competition is to Starbucks, as McDonald's Corp. and other restaurants add espresso drinks and more elaborate beverages. In the filing, Starbucks says that, in the U.S., "the continued focus by one or more large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages at a low cost has attracted Starbucks customers and could, if the numbers become large enough, adversely affect the company's sales and results of operations."



Not bad.....it took 22 months for them to either recognize or admit it......

Just terrible...




Disclosure ("none" means no position):Long MCD, none
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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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