Should I buy Starbucks
In my last post I asked the question re buying Starbucks or the Coffee ETF, I will look today at the Bear and Bull scenarios for Starbucks (SBUX) and my next post will look at Coffee (COFF).At the beginning of this year The chairman of Starbucks -Howard Schultz took back the reins as CEO. The idea being that he help the chain out of its recent slump.The stock has fallen over 45% in the last 12 months and recently was trading down near 4 year lows .The main concerns were that the chain has overexpanded and was suffering from major competition.The economic slowdown may also make people think twice about the cost of that Double tall Skinny Mocha on their way to work every day.
Bear Case
The vast amount of the growth in Starbucks was from adding new stores, but there comes a point when this is not going to be the best way of generating future revenues and profits, particularly as margins have declined in line with increased labour and rent costs.There is also increasing competition from the fast food chains such as McDonalds. In the short term Starbucks has to do something about its profitability and investing in new stores may not be the best way of doing this , sure Howard Schultz built the brand from the early days but a major slowdown in the economy is going to really hurt in this sort of industry.It may be a real challenge for them recovering particularly in the teeth of a recession
Bull Case
Currently Starbucks shares are trading at a historic low for Forward Earnings. Howard Schultz is probably the best placed person to engineer a turnaround, he has the experience to know what the organisation needs to do to be able to turn the current position round. They currently have around 11,000 stores in the US and have cut back dramatically on planned store openings with less than 1000 planned for 2009.They re looking to expand internationally where the growth potential is much higher than in the US.Longer term they may actually be able to get back on track.
In my next post I will look at the situation for Coffee and then give you my verdict .
Best Wishes
Alan
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