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Starbucks (SBUX) is the premium coffee giant, which is known both its controversial political opinions and its 26,739 causal welcoming stores across the world. Starbucks made the news globally when its CEO expresses its opposition for the Trump travel ban by hiring 10,000 refugees in January 2017. There were public calls both in support and opposition and overall, the net impact is muted.
The real shocker came in last week on July 27, 2017, when Starbucks announced that it had its Q3/2017 margin had dropped 110 basis points to 18.4% and earnings per share dropped 8% to $0.47. After the results were announced, SBUX gaped down and lost 9.2% in 1 day based on its closing price and 16% since its peak on Jun 5, 2017.
It is clear from the price action that a sizable number of investors rushed for the exit once they knew of the disappointing results from Starbucks to deliver its worst decline in two years. Is it really over for Starbucks? This articles look at where Starbucks faltered and the positive developments.
Teavana Drags Down Starbucks
Starbucks purchased Teavana at a significant 53% premium for $620 million in November 2012, which held great promise. Teavana was supposed to be the next big growth story for Starbucks after its mainstay of coffee. The cheerleaders noted that for every dollar of investments, Teavana generated 3 dollars back then. 299 teavana stores out of 300 were in malls but after four years, there has only been marginal growth to 379 stores and Teavana is not gaining traction in the $40 billion tea market.
In fact, a better way to say it is that the 379 Teavana stores and the focus on Teavana sales on Starbucks outlets led to a massive 654% increase in operating loss to US$112.3 million in Q3/2017. So in a way, Teavana has been a massive drag on earnings for Starbucks despite creative merchandising and new store designs.
Credit Suisse noted that 20% to 25% of stores will close over the next 5 years. Teavana is part of the victim in the shift towards e-commerce. Starbucks’ management recognized that impact and they have made decisive moves to close all 379 Teavana stores by Spring 2018. Once Teavana is out of the picture, the bleeding should stop.
China Acquisition and Star
Starbucks had also announced that it would be acquiring 50% from its Chinese joint ventures and will gain full ownership. The shares price of its joint venture partners, Uni-President Enterprises Corp. and President Chain Store Corp, plunged after the announcement. China had recently announced better than expected GDP growth of 6.9% and Starbucks is going to benefit from its strong brand in the country.
If Teavana is Starbuck’s worst enemy, then China and Asia Pacific is Starbuck’s best hope of redemption. Starbucks is very aggressive in Asia and it opened 1,056 new stores over 12 months and comparable store sales increased by 9%. In any cash, Starbucks has a positive cashflow of $4.58 billion and it doesn’t have to search for loans for its expansion in China.
While the 8% decline in earnings for Starbucks is a shocker, it appears that management had taken decisive action to solve this issue and China might be the trump card for greater growth in the future. There is a saying that we should be greedy when others are fearful and if this pends out, it is worth popping a bottle of wine over it. It appears that Starbucks had been oversold and investors should take note.