Tuesday, January 8, 2008

Well Howard, That Was Quick

A little more than an hour after I hit the "publish now" key on my Starbucks (SBUX) post Monday, Chairman Howard Schultz swept in and did what I suggested he do 6 months ago, he fired CEO Jim Donald.

Let's review my recommendations:
-Fire CEO Donald
-Grind US expansion to a near halt.
-Invest in the stores big time. So many of them are just dirty and so crowded with everything from coffee machines to lawn mowers for sale.
-Every location that could possibly have a drive-thru should be equipped with one
-Give investors a dividend
-Prices, they have to come down, not up.

It would seem that Schultz took 1 thru 3 and decided to enact them immediately. In a statement, Schultz's immediate goals are:

-- improving the current state of the U.S. business by refocusing on the customer experience in the stores, new products and store design elements, and new training and tools for the Company's store partners to help them give customers a superior experience;

-- slowing the Company's pace of U.S. store openings and closing a number of underperforming U.S. store locations, enabling Starbucks to renew its focus on its store-level unit economics;

-- re-igniting the emotional attachment with customers and restoring the connections customers have with Starbucks(R) coffee, brand, people and stores;

-- re-aligning Starbucks organization and streamlining the management to better support customer-focused initiatives and reallocating resources to key value drivers; and

-- accelerating expansion and increasing the profitability of Starbucks outside the U.S., including redeploying a portion of the capital originally earmarked for U.S. store growth to the international business.

Now all that is well and good and the firing of Donald was the right thing to do. Let's remember though, Starbucks is a near 14,000 store behemoth and any fixing will not be done overnight. The stock got a nice pop after hours Monday but let's be honest, we know this drill. Starbucks is going to report dreadful numbers when they announce Jan, 30th and that is the reason Donald is gone. There is nothing Schultz can do between now and then to change that. Get rid of the old guy, lump all the crap on him and let the new guy start fresh. It is textbook.

Also, the competition that has been taking customers away from Schultz in droves is only getting better. The competitive landscape Schultz faces today in no way resembles that of his previous tenure in the CEO chair. He'd be wise to recognize that, Donald sure as hell didn't.

Is Starbucks better off today that it was Monday morning? Yes it is. But, these changes will take time and the stock is by no means a buy here even with Schultz in charge. I need to see him address his competition rather than attempt to blow of its significance. If he cannot do it, I do not see shareholders being much happier in December than they are right now.

That being said, if he does address it, does fix the mess in the stores and actually comes up with affordable alternatives, shareholders will be happy. Hoe happy? After a 40% decline in 2007, just treading water ought to suffice.

Here is the rub though, with both McDonald's (MCD) and Starbucks trading at virtually identical multiples, if you had to buy one, with the US possibly going into a recession, why would you pick the high price alternative?

Are folks going to give up their high prices lattes for more affordable ones if their pockets are pinched? I think so to....

Disclosure: Long McDonald's, No position in Starbucks

Todd Sullivan's- ValuePlays

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