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Store Closings Won't Save Starbucks

Posted: Jul 03, 2008 11:15 AM by Glenn Curtis

Tickers in this Article: WEN, KKD, MCD, SBUX

On Tuesday Starbucks (Nasdaq:SBUX) announced what once was considered unthinkable: it plans to close about 600 under-performing company stores, and open less than 200 in the coming year.

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Investors took the news in stride. As of mid-day on Wednesday, Starbucks shares were in the black, whereas the market was in the red; however, these shutdowns are not going to cure all that ails Starbucks.

What Wasn't Said
There were a pair of conspicuous absences in the press release. First off, Starbucks didn't give any indication whether there could be more shutdowns coming. Six-hundred sounds like a big number, but this only equates to about 8% of the more than 7,000 U.S. company operated stores it maintained as of March 30. If more store closures are necessary to right the ship, and are likely, it may mean severance and other charges, which could hurt earnings.

The second thing missing from the press release was a comment on future earnings. Investors who have followed the story will note that in conjunction with its Q2 results, Starbucks predicted: "In 2009, the company is targeting an EPS range of $0.90 to $1.00." Yet, in this release the company didn't come out with similar guidance.

Did its crystal ball get cloudy? Might some big charges be on the way? Again, this is concerning. (Explore the controversies surrounding companies commenting on their forward-looking expectations, in Can Earnings Guidance Accurately Predict The Future?)

Big Problems, Small Solutions
It's a running joke that there are too many Starbucks, but there is a lot of truth to that joke. In some areas it is literally possible to sit and sip your overpriced coffee in one Starbucks, while watching customers at the Starbucks across the street do the same thing. Shutting down some stores could boost sales at those that remain. This market cannibalization can't be healthy, but when it comes down to it, does closing a bunch of locations really solve anything?

Beyond the economy, Starbucks has a real problem on its hands: competition. The high-end coffee market has evolved. Dunkin' Donuts offers some tasty iced lattes and iced coffees and has done a good job promoting its breakfast offerings. Meanwhile McDonald's (NYSE:MCD) has upped the ante with specialty coffees and has plans to open coffee bars. Wendy's (NYSE:WEN) and Krispy Kreme (NYSE:KKD) have been fighting for their piece of the lunch pie as well.

Starbucks has lost its way. The company built its name by selling a high priced cup of Joe, yet now it is testing $1 coffee! I don't see how closing stores or cheap coffee solves the core problem. I think the answer would be new products or a different store layout.

Bottom Line
Starbucks' recent announcement may sound like the shot int he arm the company needs, but it won't solve the competition issue or help it gain many new customers or retain existing ones.

This is a company that had a great product 10 years ago and has slowly watched the competition catch up year after year. Now it needs something new, but so far the best it has been able too offer is coffee for a buck, which is a bit like Ferrari trying to sell a minivan.

Learn to put your money where your mouth is, in our related article Sinking Your Teeth Into Restaurant Stocks.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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