News broke out that Starbucks is now offering its “Grande” iced latte for $2 after 2 p.m. This comes after the company reported its fist quarter loss in its operating history after costs on store closers mounted. I have been bearish on Starbucks for a while as I feel they have grown too fast in a short period. Now, I do not follow SBUX closely, but from the top of my head in the past year or so they have:
- decided to close some 600 stores (I might be wrong on this figure)
- The Founder (Howard Schultz) has had to come back to “save” the company
- They closed all Starbucks for a couple of hours to “retrain” their barristas
I am pretty sure there is more but lets see what Starbucks has going for it:
Pros of Starbucks
- Starbucks has created the best “experience”. Their coffee houses (restaurants?) are filled with college students who hog a table for hours, while taking a sip.
- Starbucks has great variety in coffee
- Starbucks has very loyal customers that will frequent the stores no matter what
- Starbucks has yet penetrated emerging markets
Cons of Starbucks
- Competition, Competition, Competition! – McDonald’s and Yum! have introduced their own iced and premium coffee
- Current economic headwinds- Premium coffee hurts the wallet a bit more during economic slowdowns.
- Schultz has to move the ship in the right direction quick if he wants to get Wall Streets attention
Is Starbucks a possible Magic Formula candidate?
I had a brief discussion with DaveinHackensack on GF about SBUX and we both agreed that if Starbucks continues to get pummeled, it will merit consideration for a purchase.
Earnings Yield= 6.45%
ROIC= 23.55%
Earnings yield is below my minimum requirement of 10% and ROIC is decent but not great compared to current magic formula stocks.
Disclosure : I have no position in SBUX
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