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Former high-flyer Starbucks Corp. (NASDAQ: SBUX) put a coffee shop on every street corner during the time of easy credit. The pure saturation strategy had no basis in demand.
Instead, the company rode the wave of Wall Street, believing in its own omnipotence. Books were written about the supposed greatness of company founder Howard Schultz.
It was enough to make anyone sick. Of course, no one cared when it was all working.
Now that it's apparent the strategy was completely off base, the question is, will the company survive? The answer is not obvious.
Wednesday after the bell, SBUX reported another quarter of disastrous earnings. For the period the company delivered a very weak profit of 9 cents per share. That's a near 70% haircut from profits last year.
The company had warned in December that it would miss analyst expectations. As a result, Wall Street consensus for SBUX dropped 5 cents per share to 17 cents.
SBUX's results couldn't even come close to the reduction. So much for that perpetual double-digit growth the company had manufactured over the years.
Say goodbye to any sort of premium valuation. Consumers cannot and will not pay for $4 premium drinks, especially if those drinks are nothing to write home about.
In my opinion, this company is way overextended. Despite announcing more store closings, there are too many shops for too few consumers. The model is broken.
Most telling for me in the earnings release was a pleading for Wall Street to take a long-term view. Oh, please!
The company stated that it was planning on going back to landlords asking for a reduction in rents. Keep dreaming. SBUX signed the lease. Good luck backing out now.
With this as a backdrop, shares of SBUX actually managed to hold steady yesterday when most stocks were being sold left and right.
The Schultz religion will not die easily. Oh well, I would use the complacency to sell this dog of a stock. If the company is indeed trying to negotiate lower rents as stated, you know there is more trouble coming.
I would not touch this stock until it traded for well below $5 per share.
Louis Navellier's PortfolioGrader Pro, which offers free ratings for nearly 5,000 Wall Street stocks, rates SBUX a D or Sell.
Jamie Dlugosch is a contributor to OptionsZone.com.
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Reader Comments (Page 1 of 1)
1-30-2009 @ 5:26PM
GreatR said...
A profit of 9% in this market is excellent. As you would know if you were more literate, Starbucks is named for a black. Better not let the Messiah find out what you are up to. Amen.