Four Reasons Behind The Starbucks Stall (SBUX)

By Glenn Curtis | August 01, 2007 AAA

Over the last couple of weeks, I've received emails from several people asking me why I think Starbucks Coffee Company's (Nasdaq:SBUX) stock has been languishing - despite the company's numerous growth opportunities and decent earnings.

It's a good question! And so we're going to have a look at four risks that could be holding the coffee seller back.

#1 - 40,000 Stores is a Tall Order
Firstly, I think the stock is currently trading near its 52-week low because people are skeptical of the company's goal and ability to add as many 10,000 stores over the next four years. Ultimately. management wants it to grow into a 40,000 store behemoth.Don't get me wrong, I think the goal is attainable. After all, the company has some cash on its balance sheet, has been kicking off solid operational cash flow. It has relationships with both Wall Street and the banking industry that it could tap to fund that growth. However, saying you are essentially going to be as big, or possibly bigger than a company such as McDonald's (NYSE:MCD) is a "grande" order - even for Starbucks.

#2 - Everyone is Selling Specialty Coffee Now
Another reason the stock has slumped is other fast food chains such as McDonald's, Dunkin' Donuts, and Burger King (NYSE:BKC) have all jazzed up their coffee lines over the past year, offering tasty treats such as iced coffees or premium blends. This has undoubtedly taken away some business from the company. Having these fast food stalwarts treading on Starbucks' turf is a big risk!

#3 - Lagging Sales Are Bad For Growth
Next, take a look at the company's most recent third-quarter results. All and all, they were decent. The company earned 21 cents per share, met the average consensus estimate, and its same-store-sales were up a healthy 4%. However, take a look at its sales number. Total sales for the quarter came in at $2.36 billion which is just shy of the $2.39 billion that some Wall Street analysts had been expecting.

No big deal, right? In most cases this wouldn't be an issue, but, when a company says that it's gearing up to grow and then falls short of expectations, like it or not, it does matter. It doesn't look good from an investor relations perspective, and it's also worrisome given that its expenses are rising too, including labor and milk.

#4 - Insider Selloff
Another thing worth considering is many investors (particularly institutional investors) pay attention to insider activity. Over the last six months, despite the stock's slide, senior executives have sold more than 480,000 shares. Why? Do they know something? I'm sure this selling has turned off some prospective and existing shareholders as well. (For greater insight, read Can Insiders Help You Make Better Trades?.)

'Bonus' Risks
• The slowing economy and a potential slowdown in consumer spending
• The rising cost of insurance and construction and its potential impact on new store growth
• The growing consumer awareness of the calorie and fat content in Starbucks drinks - and its potential impact on future foot traffic.

Bottom Line
Although it might not sound like it, I am still a bull on Starbucks. However, there remain a host of risks to this story that every would-be investor should be aware of before getting involved.

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