Investors cheer the newer, 'leaner' Starbucks

Posted Aug 4th 2009 1:00PM by Elizabeth Harrow
Filed under: Earnings Reports, Competitive Strategy, Starbucks (SBUX)

A report today in The Wall Street Journal (subscription required) says that Starbucks Corp. (NASDAQ: SBUX) is delving into the "lean" manufacturing techniques employed by the likes of Toyota Motor Corp. (NYSE: TM). Scott Heydon has been named the coffee company's new "vice president of lean thinking," and he's visiting Starbucks joints around the country to help eliminate wasteful movements by the chain's baristas.

Yes, that's right. Under Heydon's aegis, baristas are encouraged to economize their motions to maximize how quickly they can whip up one of the chain's signature drinks. "Motion and work are two different things," he explained to the Journal. "Thirty percent of the partners' time is motion; the walking, reaching, bending." If the process can be streamlined to include less motion, therefore, Starbucks could theoretically churn out more coffee confections in less time, and possibly with fewer workers.

While it might strike some as ridiculous that Heydon's training techniques include the rapid-fire assembly of a Mr. Potato Head doll, it's hard to argue with Starbucks' most recent quarterly results. As Sarah Gilbert reported last month, the firm easily exceeded analysts' third-quarter earnings expectations. With same-store sales still slipping, the better-than-expected results are due in no small part to $175 million in cost savings realized during the three-month period.

Investors have cheered the tangible effects of Starbucks' turnaround efforts, with the stock tagging the latest in a string of new annual highs just earlier today. The shares have gapped above support at their 10-week and 20-week moving averages, and just notched a monthly finish above their 20-month trendline for the first time since January 2007.

As the stock continues to find new peaks, the remaining skeptics could be coerced into boarding the bullish bandwagon. A healthy 6.7% of Starbucks' float remains dedicated to short interest, and 7 out of 11 brokerage firms maintain a Hold or Sell rating on the stock. Plus, the security is now trading a couple of points beyond its average 12-month price target of $16.58, as reported by Thomson Reuters.

In other words, there should be no shortage of sideline cash to help Starbucks continue its quest for new highs. As skeptical shorts and analysts are forced to capitulate to the stock's show of strength, the coffee chain's gains could very well multiply.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Tags: 52-week high, analysts, featured, inthenews, lean, lean manufacturing, SBUX, Scott Heydon, short sellers, Starbucks Corporation, third-quarter earnings, TM, Toyota

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Reader Comments (Page 1 of 1)

8-04-2009 @ 4:57PM

Greg Sherwin said...

I'm kind of lost. For the past several years, Starbucks has lamented their demise from an artisan coffee shop to a mass-produced commodity that has positioned itself against McDonald's instead of high-quality local shops.

So their response is to find greater efficiencies to automate the production of sub-par coffee?

8-05-2009 @ 2:40PM

Kelli D said...

Still a coffee drinker for life, brewing my own Starbucks coffee at home, Starbucks lost me with their Pikes Roast brew, similar to any convenience store brew. From that point, in my opinion, it was all downhill for the company.