By CRAIG HARRIS
October 8, 2007
Whether it's a new drink, a music deal or a movie promotion, Starbucks says it constantly strives to "surprise and delight" its customers.
But it was investors who got the surprise, and little delight, as the share price dropped 23 percent during a one-year period that ended Sept. 30, the end of the company's fiscal year.
During the same time, the S&P 500 Index, of which Starbucks is a member, gained 16.5 percent, including dividends.
David Palmer, an analyst with UBS Securities in New York, said
Starbucks desperately needs some "brand buzz" to turn things around.
"What can help them? Basically, executing," Palmer said. "Is having a breakfast sandwich and the second year of a pumpkin spice latte all I have to look forward to, or can they come up with something more exciting?"
While Wall Street has pummeled Starbucks in the past year, the coffee company remains profitable and has launched numerous initiatives to appease its legions of loyal customers. In the third quarter that ended July 1, profits were up 9 percent from a year ago, at $158.3 million.
Most recently, Starbucks started handing out millions of free music download cards for Apple's iTunes store, a move Palmer said was a step in the right direction to generate traffic. The company also continues to grow by opening about seven stores a day, and it has listened to concerns from health-conscious customers. In the past year, Starbucks has switched all of its U.S. and Canadian stores from using whole milk to 2 percent milk for espresso-based drinks, and it eliminated artificial trans fats in foods and beverages. Starbucks also began using milk products without a controversial artificial hormone in some markets.
Brandon Borrman, a Starbucks spokesman, said executives would not answer specific questions about the share price because the fiscal year just ended and earnings results, which move a stock price, won't be released until Nov. 15.
"We remain focused on exceeding our customers' expectation while building long-term value for our shareholders," Borrman said.
Chairman Howard Schultz, in an interview published by The New York Times last month, said there have been times when the stock has lagged, but he added: "I think the stock will take care of itself. I'm not worried about the stock price."
'Beginning of the end'?
A year ago, investors had few worries about the stock price.
Chief Executive Jim Donald created a stir when he told analysts at a conference on Seattle's waterfront that Starbucks eventually would have 40,000 stores -- 10,000 more than its previous long-term goal.
The news sent the stock price up 7.6 percent that day to close at $38.69, the biggest one-day gain in eight months. About six weeks later, on Nov. 16, the share price hit a 52-week-high of $40.01.
But on Friday, exactly a year after Donald gave the upbeat news, the stock closed at $26.84 on the Nasdaq stock market, a nearly 31 percent drop since his comments.
This was the fourth-worst 12-month performance in the Seattle-based coffee company's storied history.
The only other times Starbucks, which has produced five 2-for-1 stock splits since the company went public in 1992, had worse one-year returns was at the end of June this year and at the end of September and October 2001, shortly after the terrorist attacks.
Palmer said some analysts think the falling stock price signals "the beginning of the end" of the
Starbucks growth story, a tale of a small Seattle chain that went public in 1992 with 165 stores and grew to an iconic global business with 14,396 stores in 42 countries.
Some of the problems facing Starbucks were leaked in a memo written by Schultz, the company's corporate face.
In a Valentine's Day memo intended only for top executives, Schultz wrote that competitors such as rival coffee companies and fast-food operators had positioned themselves favorably to Starbucks customers. He also complained that decisions made to accommodate the company's incredible growth have led to the "watering down" of Starbucks.
That same month, Consumer Reports ranked McDonald's coffee ahead of Starbucks', saying it costs less and tastes better, and the Seattle P-I reported that Schultz in the previous year had shareholders pick up $1.23 million worth of perks for him despite making more than $100 million as chairman.
Schultz in early May assured investors there wouldn't be another price increase, but the company increased prices by 9 cents a drink July 31. This summer Starbucks heavily promoted "Arctic Tale," a movie about global warming that was a box-office flop.
Some analysts, meanwhile, have piled on with numerous theories as to why the company's stock price has struggled.
They have criticized Starbucks for raising prices twice in the past 12 months to offset increased dairy prices and pay raises, and some have said domestic expansion has slowed too much. But others say Starbucks has hurt itself by putting too many stores in the same markets, and still others say McDonald's and Dunkin' Donuts, with less expensive coffee, are peeling off customers.
Last month Banc of America Securities cut its rating on Starbucks to sell, saying store operations had "slipped" and that international business was still too small to make a significant contribution to operating profits.
"In some respects, it's been a perfect storm," Dan Geiman, a retail analyst with Seattle-based McAdams Wright Ragen, said of the contributing challenges. "There have been a number of factors, and each has taken a little chunk out of sales."
But Sharon Zackfia, an analyst with Chicago-based William Blair & Co., wrote to investors last month that a sluggish economy was to blame for a slowdown in comparable-store sales during the past year. She added that her firm continues "to view Starbucks' long-term story as robust."
McDonald's factor
A challenger to that growth is McDonald's, which in March began selling iced coffee drinks in the Seattle area and is testing "a variety of beverage options, including specialty coffee," said Danya Proud, a McDonald's spokeswoman.
Proud declined to confirm or deny a recent Crain's Chicago Business story that said the Golden Arches was working on selling lattes, cappuccinos and other specialty drinks in all of its 14,000 U.S. restaurants.
"It's far too early, however, to speculate about test results or specific product offerings," she said. "No final decisions have been made. To speculate beyond this, or comment on rumors, would be irresponsible and inaccurate."
If McDonald's does want to make a run at Starbucks, it has the deep pockets to do so.
The most recently reported quarterly financial results for each company show McDonald's had $669 million in free cash flow -- what a company has left over after paying salaries, interest on debt, bills, taxes and capital expenditures for expansion -- while Starbucks had $37 million.
Patricia Edwards, a Seattle-based money manager at Wentworth, Hauser & Violich, said the global hamburger chain could put a dent in Starbucks' business.
"McDonald's could be taking people on the margin in certain locations," Edwards said.
"A stay-at-home mom can get a cup of coffee at McDonald's, feed the kids and let them play."
NON-COFFEE VENTURES
Starbucks has dabbled in several other ventures to broaden its business. A few examples from the past few years:
2004
* Introduces in-store CD-burning service that allows customers to create personalized CDs at the Starbucks Hear Music Coffeehouse in Santa Monica, Calif.
* Releases Ray Charles' "Genius Loves Company" CD through a collaboration between Concord * Records and Starbucks Hear Music.
2005
* Herbie Hancock's "Possibilities" becomes first global release by Hear Music.
2006
* Markets film "Akeelah and the Bee," which has moderate results at the box office.
2007
* Starbucks Entertainment and Concord Music Group form a new record label, Hear Music.
* Hear Music announces Paul McCartney is the first artist signed to the record label.
* Markets film "Arctic Tale," a box-office bust.
* Begins partnership with Apple to give away 50 million free iTunes downloads at Starbucks stores.
P-I reporter Craig Harris can be reached at 206-448-8138 or craigharris@seattlepi.com.
Whether it's a new drink, a music deal or a movie promotion, Starbucks says it constantly strives to "surprise and delight" its customers.
But it was investors who got the surprise, and little delight, as the share price dropped 23 percent during a one-year period that ended Sept. 30, the end of the company's fiscal year.
During the same time, the S&P 500 Index, of which Starbucks is a member, gained 16.5 percent, including dividends.
David Palmer, an analyst with UBS Securities in New York, said
Starbucks desperately needs some "brand buzz" to turn things around."What can help them? Basically, executing," Palmer said. "Is having a breakfast sandwich and the second year of a pumpkin spice latte all I have to look forward to, or can they come up with something more exciting?"
While Wall Street has pummeled Starbucks in the past year, the coffee company remains profitable and has launched numerous initiatives to appease its legions of loyal customers. In the third quarter that ended July 1, profits were up 9 percent from a year ago, at $158.3 million.
Most recently, Starbucks started handing out millions of free music download cards for Apple's iTunes store, a move Palmer said was a step in the right direction to generate traffic. The company also continues to grow by opening about seven stores a day, and it has listened to concerns from health-conscious customers. In the past year, Starbucks has switched all of its U.S. and Canadian stores from using whole milk to 2 percent milk for espresso-based drinks, and it eliminated artificial trans fats in foods and beverages. Starbucks also began using milk products without a controversial artificial hormone in some markets.
Brandon Borrman, a Starbucks spokesman, said executives would not answer specific questions about the share price because the fiscal year just ended and earnings results, which move a stock price, won't be released until Nov. 15.
"We remain focused on exceeding our customers' expectation while building long-term value for our shareholders," Borrman said.
Chairman Howard Schultz, in an interview published by The New York Times last month, said there have been times when the stock has lagged, but he added: "I think the stock will take care of itself. I'm not worried about the stock price."
'Beginning of the end'?
A year ago, investors had few worries about the stock price.
Chief Executive Jim Donald created a stir when he told analysts at a conference on Seattle's waterfront that Starbucks eventually would have 40,000 stores -- 10,000 more than its previous long-term goal.
The news sent the stock price up 7.6 percent that day to close at $38.69, the biggest one-day gain in eight months. About six weeks later, on Nov. 16, the share price hit a 52-week-high of $40.01.
But on Friday, exactly a year after Donald gave the upbeat news, the stock closed at $26.84 on the Nasdaq stock market, a nearly 31 percent drop since his comments.
This was the fourth-worst 12-month performance in the Seattle-based coffee company's storied history.
The only other times Starbucks, which has produced five 2-for-1 stock splits since the company went public in 1992, had worse one-year returns was at the end of June this year and at the end of September and October 2001, shortly after the terrorist attacks.
Palmer said some analysts think the falling stock price signals "the beginning of the end" of the
Starbucks growth story, a tale of a small Seattle chain that went public in 1992 with 165 stores and grew to an iconic global business with 14,396 stores in 42 countries.Some of the problems facing Starbucks were leaked in a memo written by Schultz, the company's corporate face.
In a Valentine's Day memo intended only for top executives, Schultz wrote that competitors such as rival coffee companies and fast-food operators had positioned themselves favorably to Starbucks customers. He also complained that decisions made to accommodate the company's incredible growth have led to the "watering down" of Starbucks.
That same month, Consumer Reports ranked McDonald's coffee ahead of Starbucks', saying it costs less and tastes better, and the Seattle P-I reported that Schultz in the previous year had shareholders pick up $1.23 million worth of perks for him despite making more than $100 million as chairman.
Schultz in early May assured investors there wouldn't be another price increase, but the company increased prices by 9 cents a drink July 31. This summer Starbucks heavily promoted "Arctic Tale," a movie about global warming that was a box-office flop.
Some analysts, meanwhile, have piled on with numerous theories as to why the company's stock price has struggled.
They have criticized Starbucks for raising prices twice in the past 12 months to offset increased dairy prices and pay raises, and some have said domestic expansion has slowed too much. But others say Starbucks has hurt itself by putting too many stores in the same markets, and still others say McDonald's and Dunkin' Donuts, with less expensive coffee, are peeling off customers.
Last month Banc of America Securities cut its rating on Starbucks to sell, saying store operations had "slipped" and that international business was still too small to make a significant contribution to operating profits.
"In some respects, it's been a perfect storm," Dan Geiman, a retail analyst with Seattle-based McAdams Wright Ragen, said of the contributing challenges. "There have been a number of factors, and each has taken a little chunk out of sales."
But Sharon Zackfia, an analyst with Chicago-based William Blair & Co., wrote to investors last month that a sluggish economy was to blame for a slowdown in comparable-store sales during the past year. She added that her firm continues "to view Starbucks' long-term story as robust."
McDonald's factor
A challenger to that growth is McDonald's, which in March began selling iced coffee drinks in the Seattle area and is testing "a variety of beverage options, including specialty coffee," said Danya Proud, a McDonald's spokeswoman.
Proud declined to confirm or deny a recent Crain's Chicago Business story that said the Golden Arches was working on selling lattes, cappuccinos and other specialty drinks in all of its 14,000 U.S. restaurants.
"It's far too early, however, to speculate about test results or specific product offerings," she said. "No final decisions have been made. To speculate beyond this, or comment on rumors, would be irresponsible and inaccurate."
If McDonald's does want to make a run at Starbucks, it has the deep pockets to do so.
The most recently reported quarterly financial results for each company show McDonald's had $669 million in free cash flow -- what a company has left over after paying salaries, interest on debt, bills, taxes and capital expenditures for expansion -- while Starbucks had $37 million.
Patricia Edwards, a Seattle-based money manager at Wentworth, Hauser & Violich, said the global hamburger chain could put a dent in Starbucks' business.
"McDonald's could be taking people on the margin in certain locations," Edwards said.
"A stay-at-home mom can get a cup of coffee at McDonald's, feed the kids and let them play."
NON-COFFEE VENTURES
Starbucks has dabbled in several other ventures to broaden its business. A few examples from the past few years:
2004
* Introduces in-store CD-burning service that allows customers to create personalized CDs at the Starbucks Hear Music Coffeehouse in Santa Monica, Calif.
* Releases Ray Charles' "Genius Loves Company" CD through a collaboration between Concord * Records and Starbucks Hear Music.
2005
* Herbie Hancock's "Possibilities" becomes first global release by Hear Music.
2006
* Markets film "Akeelah and the Bee," which has moderate results at the box office.
2007
* Starbucks Entertainment and Concord Music Group form a new record label, Hear Music.
* Hear Music announces Paul McCartney is the first artist signed to the record label.
* Markets film "Arctic Tale," a box-office bust.
* Begins partnership with Apple to give away 50 million free iTunes downloads at Starbucks stores.
P-I reporter Craig Harris can be reached at 206-448-8138 or craigharris@seattlepi.com.
Is there ever much more content on this blog besides bashing Starbucks at every turn and extoling the virtues of Fair Trade?
ReplyDeleteIt that all Coffee Politics means?