Starbucks Brands … I mean, Coffee
June 5, 2012 Leave a comment
So a portfolio manager I once knew said to me 5-10 years ago: “don’t buy companies with the word ‘brands’ in it” Suffice it to say he had bad experience with companies with the word ‘brands’ in their names. As I’ve looked back through the years, I think he might have had a point: companies with the word ‘brands’ are probably a portfolio of unrelated companies. As such, they tend to deserve a ‘conglomerate discount’ (there’s plenty of literature on this, so I won’t bother explaining). They lack focus.
Anyway, both SBUX and GMCR were down in the morning (the latter hitting a new 52 week low), in an otherwise boring market, yet they started rallying mid day, with above average trading volumes. They closed up 3.3% and 4.7% respectively. Some people speculated SBUX was announcing positive news related to k-cups, and apparently bought SBUX/GMCR shares with this hope.
Too bad the news had nothing to do with K-Cups (in fact, even if it did, the gmcr bulls don’t seem to understand the word ‘cannibalization’…more on this at a later time).
“Starbucks to acquire Bay Bread and La Boulange brand for $100M”
1) Panera Breads is taking some customers away from sbux, and/or PNRA is limiting SBUX’s current/anticipated store traffic growth potential (obviously I’m not referring to customers who get their morning coffee fix from SBUX, but rather those who are looking to meetup with, read, study, etc. at a location with wifi, positive ambience, and edible goods)
2) this small acquisition is like a ‘real option’ to expand/compete with PNRA, and/or to limit the expected/current damage from PNRA …you might even say it’s a cheap form of R&D
3) SBUX might see longer term threats to its bread n butter coffee retail business in the US, and it is taking action now, via portfolio of alternative ideas, to be proactively prepared. It’s a form of ‘fat tail’ insurance for SBUX.
4) Howard Schultz wants to take over the food world, is bored, wants to do with another food/restaurant what it successfully did with Starbucks.
5) Only the paranoid survive, SBUX gets it, and is firm believer that ‘tinkering’ is a necessary ingredient for business survival…even if it doesn’t make immediate sense, and even if most ‘tinkering’ efforts fail to generate additional profits. It helps inculcate a culture of innovation, competitiveness, etc. so that, at the very least, it defends its moat.
I commend Starbucks for its success, and for its foresight. Here’s the thing: a restaurant is NOT a high margin, high ROE, high barriers to entry, etc. business. In fact, selling coffee in a cup, at the highest price points compared to competitors, is one of the best food/retail businesses the world has ever seen (for food/retail; see sales per square foot to see what I mean). So no matter how you look at it, this looks bad short/medium term; SBUX is investing $100 million into a lower quality, lower return business, instead of opening more coffee stores…or returning the money to shareholders.
For the record, I own SBUX LEAP puts, and bought them when SBUX was in the $60s. My thesis at the time was simply: cheap insurance, that is priced to double with merely a healthy correction in the stock. And oh, I have until 2014. (the other reason is while my favorite shorts are fraud stocks, it actually helps to diversify into other ‘buckets’ in my short book. I’ve found it’s a necessary/beneficial thing to do to manage risk in the short book).
Contrary to what seems like popular belief lately, its business history (and definitely its stock’s history) exhibit classic boom/bust symptoms. Not to mention, it’s not cheap even given its growth potential, nor does it pay you much to wait (yipee, 1.3% dividend yield). So no, it remains a Consumer DISCRETIONARY name, not a STAPLE. Yes, people need to eat, need to mingle with others, and ‘need’ their coffee; the problem is, same arguments were made in 2006, 2007, 2008…all the way down.
And this is the idea some hedge fund manager presented as his long idea, at the Ira Sohn Conference? Even as the stock is near all time highs, up 50% in last 12 months, the global macro picture looking murky (at best), growth slowing, competition picking up in coffee land (as coffee prices decline), etc.
I will hand it to one of the bulls of the stock (from much lower, and who only recommends going long it currently for very short term trades), the structural unemployment problems may have helped SBUX grow in the US, due to its wifi.
I would love to hear the case for buying SBUX as an investment at these levels. Its market value only seems supported by those hoping for a greater fool.