01 July, 2008

Starbucks Hit by Economy, Plans Hefty Store Closures

The global gourmet coffee giant, is and has been under tremendous pressure to come up with something, anything to regain Investor confidence, as a weakening US economy is having a dramatic effect on earnings. The company had previously announced a slow down in "planned store openings" and today after the market closed, dropped the other end of the hammer.

Starbucks (SBUX) announced 600 store closures and a further halving of 2009 expansion plans. Of course with that comes about 12000 job cuts and/or job shifts. If the company can deliver on promises to "find workers jobs at other cafes" the number of job cuts could be significantly lower than 12000, however the Street seems to be optimistic executives can wrangle up as much in cost savings going forward as possible. Starbucks jumped after hours about 5% to near $16.50/share, still a far cry from its 52-week high of $28 and just off lows of $15.

Economic factors have weighed heavily on this company, which does make its business on the backbone of the luxurious. When driving the work costs you twice to three times what it did a year ago, it certainly can be hard to justify an expensive coffee. The closure of stores for Starbucks signals a significant shift in short-term thinking. The coffee giant built itself through incredibly rapid expansion, and a turn here towards contraction is a far different course for management.

At least the executive branch got the first part right, closing what they claim to be the poorest performing stores and stores open less than three years. Perhaps those years of expansion are catching up to the company? Perhaps putting a Starbucks every couple blocks in Major centers was indeed overkill, but as the old overused adage goes: Strike while the iron's hot.

Investors aren't striking anything now with Starbucks, as declines of 15 and 26% in respective 3 and 6 month time frames are truly uninspiring performances. Could this move spark a turnaround? Unlikely, it'll take Macroeconomics to get customers back into stores in record numbers, or some truly innovative thinking and advertising.
-> More cost-effective menu items coupled with effective quality assurance advertising.
-> Hiking or tweaking pricing for services like Wi-Fi, or its niche Music Services.

Starbucks is a household name and it'll be back in the years to come, but over the short term, these stock price spikes post drastic events are just that, and will eventually give way to further deteriorating financial results. For the time being the stock should simply be held, if Investors already have the misfortune of owning it.

Disclosure: Author does not own SBUX

No comments: