Starbucks, are you listening to yourself?

Posted by: Aaron Pressman on November 16, 2007

Premium coffee purveyor Starbucks (Symbol: SBUX) reported its fiscal fourth quarter results last night — that’s the calendar third quarter to you and me — and it wasn’t pretty. As we’ve been saying and saying, the company is under a massive assault from McDonalds (MCD), Dunkin Donuts and seemingly ever other retailer with a brew pot in the back. The company’s key problem, however, has already been precisely identified by founder and chairman Howard Schultz, all the way back in February! That is, in its monster grab for growth, the company lost touch with its roots and culture as a coffee house opening the door for competitors with no coffee bona fides to steal their high margin biz. And yet, here we are months later and the chain’s answer is to slow the opening of new U.S. stores over the next year by less than 10% and start running television commercials. There’s been some reshuffling of executives, no serious new blood brought in, and again a promise to introduce fewer new beverages, but that hardly seems like enough to ward off the increasing assault.

Last night’s report showed okay results for the past three months, revenue rose 22% and net income per share was 21 cents, but the firm hacked its guidance for the next twelve, something the stock market absolutely hates, as I’m sure we’ll see when the stock (already down over 30% this year) open in an hour. Instead of same store sales growth of up to 7% in 2008, as the company projected back in August, the high end now caps off at 5%. The high end of revenue growth could hit 17%, again a significant slowdown from the previous year, and 1% lower than the August projection. And maximum earnings per share growth of 21% reflects a slight cut from the 22% previously offered.

Also troubling was the 1% decline in the number of sales transactions during the quarter. Only thanks to 2 price increases, and likely the expansion of hot breakfast offerings to more spots, was Starbucks able to report a 4% increase in same store sales. On a conference call with analysts, CFO Peter Bocian also revealed somewhat vaguely that the performance of stores opened in 2006 was below the average of stores opened longer and stores opened in 2007 were even “slightly below the ’06 class.”

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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