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  1. Home
  2. / Investing
  3. / Consumer Discretionary

3 Reasons to Stay Away From Starbucks (For Now)

Comps missed estimates, the Japanese segment is a drag and SBUX may be losing market share in the U.S.
By BRIAN SOZZI Apr 22, 2016 | 11:00 AM EDT
Stocks quotes in this article: SBUX, M, YUM, MCD, PEP, KO

Coffee (and increasingly food) giant Starbucks (SBUX) reported its usual quarter, on the surface. Earnings came in line with consensus. Sales growth in the U.S. continued to trounce almost every single publicly traded retail concept. Yes, Action Alerts PLUS holding Starbucks is a retailer, even though many don't consider it as such. In China, the company kept notching solid transaction growth. Full-year financial forecasts were maintained. And above all, Starbucks served up its typical pomp and circumstance on its earnings call - to keep analysts intrigued with the future, instead of focusing too hard on just the numbers.

But something felt off about Starbucks' quarter, and it wasn't the fact that founder and CEO Howard Schultz dialed into the call from South Africa and mostly let his executive team field the annoying analyst questions. I think the aggregation of the items below should warrant a reassessment of Starbucks stock, which has had one heck of a run in the last year. The stock could tread water near-term, and be more at the mercy of what I suspect will be a volatile broader market between now and the next earnings report in July. 

1. Same-Store Sales Miss Estimates, Everywhere

I can't recall the last time Starbucks missed Wall Street's same-store sales estimates in every single region - as it did for this second fiscal quarter. To me, this is new evidence that the global macro environment that is weighing on consumer names, such as Action Alerts PLUS holding PepsiCo (PEP) and Coca-Cola (KO) is also hurting mighty Starbucks. 

Analyst estimates for earnings will have to be reigned in: Coupled with slower-than-expected sales in the quarter, Starbucks is also investing a ton in technology. If slower sales trends persist (which is how the analyst community will read the misses), the company could actually miss forecasts for the third quarter. 

2. Interesting Results in the United States

On a stand-alone basis, Starbucks' 7% same-store sales increase in the Americas is absolutely impressive. If a Macy's (M) were posting these types of sales gains, the stock would be double where it is today, which underscores the uniqueness of Starbucks. Still, Starbucks' domestic comps in the quarter slowed from a 9% gain in the first quarter, and I fancy it was because of greater price competition in coffee and for breakfast and lunch food patrons, as sales slowed for Starbucks during breakfast and lunch hours. 

Call it Taco Bell Syndrome: Yum! Brands (YUM) noted on a call Thursday that sales at its Taco Bell unit (which is a U.S.-only outfit) slowed a good deal, due to increased discounts by hamburger sellers. I think the hamburger names, such as McDonald's (MCD) have improved the quality of their food, while Starbucks, arguably, has not. In my opinion, the coffee chain's food is not up to par. It is purchased mostly because people are already in line for coffee and get tempted. This improvement on the part of hamburger sellers has lead to some modest loss of market share for SBUX. Based on how Starbucks is valued, share loss of any kind is unacceptable. 

3. One New Business Is Bothersome

In Sept. 2014, Starbucks purchased the rest of its sizable business in Japan (it had been operated as a joint venture). The business is now being included in the company's China, Asia-Pacific comp numbers. Judging by the comments on the call, the substantial business for Starbucks did not perform spectacularly on the sales front during the quarter, and actually held back the segment's overall performance. Starbucks made it a point to note that transactions in China rose a solid 5% (which, one must note, is slower than the country's GDP growth) and that they grew even faster in tier one and tier two cities in the country - where 65% of its over 2,000 stores are located. Starbucks didn't dissect Japan, and as a result I think it signaled that it is slow-growth business in a slow-growth country. The company operates over 1,100 stores in Japan. 

On a positive note, I want to give you a reminder of what great leadership looks like. Schultz, a master motivator and leader, let his execs handle most of the conference call. This is a rarity, but more in keeping with his new role at the company. 

But, when execs started to stumble a bit on answering the impact of the new Rewards program, Schultz stepped in, said the team was doing great and cut through the silliness that analysts on the call were pitching. He made clear, concise points that ultimately tempered concerns on the impact of the Rewards program change. 

Good leaders have this knack to get to the heart of a problem quickly and address it accordingly, and also express confidence in their team to get the job done. Losing companies often lack leaders of Schultz's quality and foresight. He has also instilled a best-in-class culture within the organization that will help the company win even when he is no longer CEO. 

Schultz's leadership is part of the reason why many readers likely own Starbucks right now, and will likely look to invest in the name well into the future. But not today, given the concerns laid out above. 

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At the time of publication, Sozzi had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

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