How to Successfully Invest In Starbucks, Now
Things to always know on Starbucks (NASDAQ: SBUX) in the days before its earnings release:
Customer traffic and ticket: Starbucks was never a cheap cup of coffee, and that has only become worse amid its decision to raise prices in 2011 to combat higher coffee bean prices. For the company to stay in the good graces of Wall Street, store traffic and customer ticket have to increase, signaling customers are coming through the door briskly no matter if their favorite Venti costs $0.50 more.
CPG: Decoded, that is short for the company’s Consumer Product Group, or the segment responsible for developing products to be sold in grocery stores (such as coffee beans and Via single-serve packets). Since this is Starbucks’s newest division, and one that Wall Street is banking on to mint money, every financial metric is under the microscope.
China: Starbucks is aiming to have 1,500 stores in China within the next two and a half years, up from 900 or so now. Anything other than very strong sales in China will lead to disappointment on Wall Street.
Guidance: Unless Starbucks is really fumbling with its products or customer service, competitor Dunkin Donuts is selling magic coffee, or the U.S. is in a recession Wall Street expects Starbucks to have a “bullish outlook” time after time. To be bullish is to expect strong sales and products every quarter.
Why Not to Invest in Starbucks, this Second
Without the use of too much analytical jargon, the stock market looks to be fairly valuing Starbucks. In this sense, investors have sent Starbucks shares up considerably since the last earnings report months ago in anticipation of strong U.S. sales, good CPG revenue, and caffeinated comments from the enthusiastic CEO Howard Schultz. The finer points:
• The stock market wants to see increased customer traffic and ticket from Starbucks stores on the back of special promotions thought the day (such as the $2.00 coffee after noon with a receipt), interest in food, and little resistance to higher prices on specialty drinks and larger sizes.
• The market wants to see Starbucks raise its full year earnings from the current $1.78-$1.82 per share.
• The stock market wants to learn when Starbucks will financially benefit from lower coffee bean prices (coffee bean prices are at the lowest level in 18 months; however Starbucks has bought supply into next year at higher prices).
Starbucks so happens to be a recommendation of ours from earlier in the year. It’s not that we are no longer keen on Starbucks the company or the stock “long-term”, it’s that you risk losing money this week based on our decoded analysis. Hence, we suggest selling some of your holdings or avoiding the stock. As we have decoded, the stock market is bracing for sheer joy on Starbucks’ earnings day, perhaps overlooking the fact the European segment has been performing financially below plan and the CPG segment is probably being hampered by high coffee bean costs. More risk than reward, if you ask us.
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