In a brilliant article in The New York Times, the paper points out that of all the mistakes that Starbucks (NASDAQ: SBUX) made in its expansion, picking real estate locations may have been the worst. Much of the analysis for the piece came from talking to real estate brokers. The paper writes, "In some cases, brokers say, Starbucks misjudged the risks of putting stores close to each other, leading to the decline in same-store sales."
It is astonishing that Starbucks would make such basic errors and speaks to what happened to management during the period when founder Howard Schultz was absent from the CEO job. The team that replaced him said it believed the company would eventually have 40,000 store worldwide. It clearly cut corners in terms of planning to get there.
The real trouble with the real estate location decisions is that it may take a very long time to fix. Closing stores may be easy, but finding better spots, negotiated for the space, and building out new stores will be time consuming and, perhaps, expensive.
Schultz and his minions are paying for rampant growth, and the poor souls who worked for him are paying more. Almost 12,000 will lose their jobs.
Douglas A. McIntyre is an editor at 247wallst.com.
I'll admit the headline is a bit deceptive. On one hand McDonald's (NYSE: MCD) has seen a resurgence in its business and frankly, the shares have done very well. In fact since McDonald's went through its own set of problems five years ago, the stock has since tripled in value.
The parallels between Starbucks (NASDAQ: SBUX) and McDonald's are very eerie. Starbucks has hit the proverbial wall after a successful ride from 1992 to 2007 as one of the premier GameChanger stocks around. Starbucks, like McDonald's over-expanded its store base in the United States and began to cannibalize its own revenues. Starbucks, like McDonald's, lost its principle focus and did not tend to 'what got them there".
In late 2002 McDonald's stock had just finished a 4 year run of losing 70% of its value. The company was becoming a hodgepodge of different menu items, culminating with the disastrous release of the McLean Deluxe, which was not even all beef! Advertising and marketing programs were a mish-mash of geographical themes yielding no consistency whatsoever. McDonald's even posted, for the first time in its illustrious history, an operating loss in 2002, and experienced negative same store sales for the first time, as well.
Then CEO Jim Cantalupo said enough was enough. McDonald's closed 700 unproductive stores (sound familiar?) and re-focused its menu and advertising campaign.
After a brief refreshment, today just ended up being ugly rather than what many were hoping would be a boring day. Today's action was likely due more to analyst concerns, but a late-day news report on a security breach scare at LAX airport may have added stress to a trading day that would have otherwise been quiet. The markets are grossly oversold, but there just seems to be very few reasons for traders to hit their "BUY" buttons on keyboards.
These are UNOFFICIAL closing bell levels for major index readings:
General Motors (NYSE: GM) was the daily disaster due analyst call. Merrill Lynch downgraded the stock to Underperform and noted that "the chances of bankruptcy aren't impossible." 24/7 Wall St. noted the same weeks before, and we even posted odds on what the chances are that major auto or airline companies would have to file for protection by the end of 2008 to early 2009.
Starbucks (NASDAQ: SBUX) indicated plans to close 600 unprofitable domestic stores and incur pre-tax charges of $328-$348 million, including asset write-downs of $200 million.
Deutsche Bank says: "With US consumers still reeling and McDonalds (NYSE: MCD) on the cusp of a nationwide specialty coffee rollout, it is too early to call a bottom on fundamentals – maintain Hold."
SBUX July option implied volatility of 42 is near its 26-week average of 39 according to Track Data, suggesting non-directional price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
U.S. stock futures were higher Wednesday morning, as Wall Street could try to having yet another positive session. While Starbucks news of store closing and reports Microsoft may still be interested in Yahoo helped lift sentiment, UnitedHealth already issued a warning this morning. Employment data is also on tap before the market opens.
U.S. stocks finally ended higher on Tuesday. Surprisingly, it was car sales that helped the mood on the Street as as June sales came in not as bad as expected. The Dow industrials ended 32 points higher, or 0.28%, the S&P 500 added 4 points, or 0.38%, and the Nasdaq Composite added 11 points, or 0.52%.
Today, investors will have the ADP June private sector employment figures to chew on ahead of the government's report tomorrow. The employment report is expected to be released at 8:15 a.m. EDT. Then, at 10 a.m., May factory orders are due out.
Also on the docket today is weekly crude inventories, usually released at 10:30 a.m. EDT. While oil came off highs Tuesday due to a slightly stronger dollar, it again rose above $141 a barrel Wednesday, due to persistent supply concerns that has analysts warning of higher prices yet. An IEA report saying supplies will remain tight and demand will likely grow despite higher prices helped push prices higher.
I hemmed and hawed when I saw Jennifer Openshaw's piece on MarketWatch a few weeks ago; her opinion was that Starbucks (NASDAQ: SBUX) would recover much of its lost value in these past several months of sluggish sales, rising milk costs and slipping coolness, no matter what the naysayers, say. Her argument: that Starbucks was great because of its atmosphere and general quality standards in coffee. While I certainly agree that Starbucks is still an attractive "third place" and would pick Pike Place brew every time over McDonald's or Dunkin Donuts coffee, I hesitated. Had management already made too many mis-steps? Had hubris got the best of the 'Bucks?
The latest news; that Starbucks management has plans to close 600 stores in the U.S. this year; could be an indication of positive things in the company's stock price. It certainly had traders in after-hours activity eagerly snapping up shares, sending 72 cents, or 4.6%, to $16.34 around 2 a.m. I'm always leery, though, of a huge strategy reversal such as this. In my analysis of Starbucks' financial statements, the company spends about $300,000 to start a new store, and this is largely funded through cash. Management regularly offers old furniture and equipment to its high-ranking employees when upgrading or shutting down a store, so it's unlikely that much of the cost will be recouped. Doug McIntyre noted further that Starbucks will continue to pay more millions in lease costs; the company is known for locking up prime real estate with serious long-term lease agreements. Sure, the loss won't affect the cash balance much, and the charge will be "one-time," so the financial picture will still look rosy in a year when the charge has dropped into "historical financial statements." Investors don't look back.
But by acknowledging that some $180 million in costs, not to mention the hundreds of millions probably spent to train and employ staff at these locations, was a big waste of money, Starbucks management is owning up to a future of slow growth.
Starbucks (NASDAQ: SBUX) recently began very wide distribution of Pike Place Roast. It tastes more like the coffee most people brew at home. It is inexpensive. It has drawn new customers to the coffee retailer.
And some people think it tastes like sewage.
According toThe Wall Street Journal, "the new strategy, which played down the company's more-established robust roasts, has touched off a debate about what customers think Starbucks should stand for: bold coffee for connoisseurs or a tamer brew for the masses?"
Starbucks founder Howard Schultz has been concerned about bringing the company back to it roots, the look and intimate feel of the company's early stores, but the new drink seems to run counter to that.
The Pikes Place product says much about what is wrong with Starbucks. Its appeal has been the originality of its products, but it needs coffee that will help its sales, which have been weak, grow again. Starbucks seems to be of two minds, which is never good for a company working on turning itself around.
With the economy in the dumps, what Starbucks does may not matter for now. Traffic is being hurt by consumer spending. The shares in the company are way down. Pike Place is just another cup of coffee.
Douglas A. McIntyre is an editor at 247wallst.com.
Starbucks (NASDAQ: SBUX) shares are falling today after the company announced over the weekend that it will close three of its stores in San Juan, Puerto Rico, admitting that economic times are tough and that perhaps the stores were too close to other Starbucks locations (Gee, you think so?). This might not be the worst thing in the world for the brand if it closes down some locations if it over-expanded, but at the same time, if customers don't come back, we could be seeing the beginnings of another Krispy Kreme (NYSE: KKD) situation. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on SBUX.
After hitting a one-year high of $28.60 in August, the stock hit a one-year low of $15.39 in April. This morning, SBUX opened at $16.19. So far today the stock has hit a low of $15.89 and a high of $16.33. As of 12:30, SBUX is trading at $16.24, down 11 cents(-0.7%). The chart for SBUX looks bullish but deteriorating, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $20 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in three and a half months as long as SBUX is below $20 at October expiration. SBUX would have to rise by more than 23% before we would start to lose money. Learn more about this type of trade here.
SBUX hasn't been above $20 since January and has shown resistance around $17 recently. This trade could be risky if the company's earnings are a positive surprise, but even if that happens, this position could be protected by resistance SBUX might find at its 200 day moving average, which is currently around $20 and falling.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SBUX.
Microsoft Corp. (NASDAQ: MSFT) co-founder Bill Gates is riding off into the sunset today, at least he sort of is. The man who made nerds and geeks "cool" is shifting his focus away from the world's largest software company to his philanthropic work.
Gates contributions to modern society cannot be understated. When he gets older, my 20-month-old son will no doubt be surprised to learn that there was a time when computers were expensive, impersonal devices the size of several refrigerators. Gates helped make the computer personal. Of that there is no doubt. How he did it remains open to debate. The elite geeks despise Microsoft for developing expensive, inferior operating systems that are prone to crashes and computer viruses.
The shift by Gates, which has been expected for some time, comes as the Redmond, Washington-based company is at a crossroads. Back in the 1970s and 1980s, Microsoft was the underdog that upended the tech establishment lead by International Business Machines Corp. (NYSE: IBM).
Reputation surveys are usually beauty contests based on consumers' vague feelings about companies that they know or do business with. That makes them relatively useless.
Still, one poll has created news by putting Google (NASDAQ: GOOG) on top of its list. Whether that will translate into more profits or a better stock price is open to debate.
The Harris Interactive Reputation Quotient poll put Google in first place, replacing Microsoft (NASDAQ: MSFT) and dropping it to 10th place. Reuters writes that the polling firm said "They [Google] absolutely get tremendous credit for the social responsibility, which for them is also linked with their vision and leadership." Google's treatment of its work force was also a big factor.
Getting onto these lists probably does not mean much. The Fortune "Most Admired Companies" survey includes Starbucks (NASDAQ: SBUX) and GE (NYSE: GE). Both companies have had troubles in their operations and have missed earnings estimates. Their stocks have sold off sharply.
Google may want to see if it can tone down its reputation. That may be better for shareholders.
Douglas A. McIntyre is an editor at 247wallst.com.
Starbucks (NASDAQ:SBUX) can't seem to do well in the US. People who feel poor don't want $5 coffee and the chain seems to have built too many stores here. The company has even gone so far as to close some.
But, bright on the horizon, the Seattle-based company sees Europe as a potential region for expansion. So, the company will open 150 new stories on the continent. According toReuters, "The coffee shops are to be opened at airports and railway stations and come as the chain looks to offset a slumping U.S. market with overseas growth." The new stores will be franchised and run by a UK company called SSP. At least that probably means Starbucks will not be taking all of the financial risk.
Starbucks may find that a recession in Europe is likely to keep people out of expensive coffee shops just as much as its has in the US. But, the new push into the continent has a more telling aspect. Starbucks does not have the taste for risk that it once did. There was a time when the company would have taken all of the risk and all of the reward to push more aggressively into a large market.
Starbucks is not only suffering from slowing sales. It is getting timid.
Douglas A. McIntyre is an editor at 247wallst.com and author of the Ten Stocks Under $10 letter.
American International Group (NYSE: AIG) shareholders -- former AIG director, Eli Broad, and two fund managers , who together control about 4% -- are asking for changes to the management and board of the world's largest insurer, which has been struggling with the fallout of the subprime mortgage mess.
Caterpillar Inc. (NYSE: CAT) said it will spend $1 billion over the next two years to expand capacity in five of its Illinois factories, and will shift production at some of its plants to address the demand for machines used mostly in mining and large infrastructure projects. Also, CAT and Navistar International Corp. (NASDAQ: NAVZ) will begin cooperating to pursue new on-highway truck business and cooperate on an variety of engine platforms.
Starbucks Coffee Co. (NASDAQ: SBUX) said Thursday that it has reached a licensing agreement with SSP to open coffee retail stores in more than 150 airports and train stations in Europe. Financial terms were not disclosed.
I almost can't believe that I'm writing about this, but I guess some prudes will get up in arms about anything.
BBC News reports that a U.S. based Christian group known as The Resistance is calling for a nationwide boycott of the coffee selling giant, Starbucks Corp. (NASDAQ: SBUX). The group's complaint against the company stems from the commemorative use of a toned-down version of the company's original logo. Starbucks states that the logo, which features a dual-tailed mermaid sporting cleavage, is not inappropriate. The fringe Christian group refers to the logo as a naked woman with legs "spread like a prostitute."
The news report from BBC states: "Howard Schultz, who bought Starbucks in 1982, described the emblem in his memoirs as "bare-breasted and Rubenesque; [it] was supposed to be as seductive as coffee itself."
To look at the logo that is claimed to offend, one has a difficult time even seeing it as raunchy. To call the flared dual tails a pair of spread legs might be a feat best accomplished while on serious hallucinogens. Clearly, this group of well-meaning Christians is at a loss for real issues to attack. The fringe group's lack of imagination in seeking some media exposure for itself is seen by me as a shallow act of spotlight grabbing.
Starbucks is reported by the BBC as stating that the bare breasted mermaid will appear on some of its cups for several weeks as part of a company promotion. It was not revealed which of Starbucks' 16,000 coffee shops in 44 countries will be featuring the racy mermaid cups. However, I'm sure that anyone who is interested in getting one of these alleged soft-porn coffee cups may rest assured that, before too long, they'll be available to anyone via eBay.
Public companies with auction-rate securities on their balance sheets were, in many cases, forced to write-down the value of those assets because they have become illiquid. Firms took on the investments because they were considered as easy to buy and sell as cash, but offered better interest rates. Then the market for the securities stopped trading.
Under GAAP, the companies holding the auction-rate paper had to take a P&L charge.
According toThe Wall Street Journal, "According to a study of earnings reports conducted by securities-valuation firm Pluris Valuation Advisors LLC, 402 public companies disclosed that they held variations of auction-rate securities. Half had written down the value of their holdings. Of those that did, the average markdown was 13.2%, the study shows."
What investors should watch for is the companies which have not acted, because they could face a significant hit in future quarters. That, in turn, could mean a sell-off in their shares. Some companies which do not have huge amounts of cash, could actually face a credit squeeze.
Several fairly big and, one would think smart, companies that took a haircut in Q1 include Google (NASDAQ: GOOG) and Starbucks (NASDAQ: SBUX).
I'll admit the headline is a bit deceptive. On one hand
Starbucks
U.S. stock futures were higher Wednesday morning, as Wall Street could try to having yet another positive session. While Starbucks news of store closing and reports Microsoft may still be interested in Yahoo helped lift sentiment, UnitedHealth already issued a warning this morning. Employment data is also on tap before the market opens.
I hemmed and hawed when I saw 
I almost can't believe that I'm writing about this, but I guess some prudes will get up in arms about anything.
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