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Starbucks Tanks 10%: Time to Buy?

24 April 2008 No Comment

With many bloggers out there calling Starbucks (SBUX) a potential value buy these days, many investors including myself have looked at the depressed stock price of Starbucks as a possible entry point in a great company. Lucky for me, I didn’t pull the trigger.

Yesterday, Starbucks announced lower guidance amid a tough economic environment and as a result, the market pummeled the stock. With an additional 10% hair cut on the stock price, is it time to buy?

I believe the answer is no. Starbucks is facing higher costs and slower foot traffic in their stores, a tough combination that is going to continue through this year. Many investors are excited with Howard Schultz back leading the charge, but they are going to have to do better than simply releasing a new coffee blend. People go to Starbucks for the atmosphere, not for superior coffee. McDonalds,
Dunkin Donuts and others offer great coffee.

Schultz does seem to be open to whatever changes are necessary to right the ship. Starbucks launched http://www.mystarbucksidea.com to allow customers to submit new ideas for Starbucks to implement. While the site is full of ideas that will have no impact on igniting growth for the company, I believe there are two major things to would help turn Starbucks around.

New Food Options

The food options at Starbucks are simply pathetic. With more places ramping up their coffee campaigns such as McDonalds, people have more options for their coffee fix and complimenting food options play a factor.

Frequent Customer Rewards

Starbucks should implement a frequent customer rewards program to benefit the most loyal Starbucks customers. There are countless customers that drink Starbucks almost every day. How about rewarding them and adding to that number at the same time?

Bottom Line

Starbucks has too many forces working against it right now. Prices are higher due to commodity costs and the average consumer is more concerned about his gas tank than his luxurious latte. Starbucks has a fanastic brand and strong management, but I need to see some changes in both the economic environment and my local Starbucks before I’m ready to add this stock to my portfolio.

20-Something Action Steps

For the 20-Something investor, you want to build a portfolio of strong companies with a clear long term growth strategy. While Starbucks has some strong characteristics, there is no clear long term growth strategy. Starbucks is looking to the average consumer for suggestions on their growth strategy and while this may prove to be successful, it is too risky for one of your pillar investments of your portfolio.

With that said, it would be wise to keep an eye on Starbucks. If they can turn it around, you may have an opportunity to get in at a decent price. However, let someone else take the risk in buying this stock too early as I expect it has further down to go.

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