Everyone has heard the cliche jokes about how Starbucks Corporation (Nasdaq: SBUX) locations are popping up everywhere you look in the U.S. Unfortunately for Starbucks investors, the 13,000-plus U.S. Starbucks stores may actually be eating into each other’s business.
Starbucks stock has declined more than 12 percent in the past three months, and the company’s comparable-store sales growth dipped to only 4 percent in the second quarter. According to BMO Capital Markets analyst Andrew Strelzik, it may be extremely difficult for Starbucks to reaccelerate its comparable-store sales growth simply because of the overlap in its existing locations.
In addition, Starbucks is also facing increasing outside competition in what has become a very difficult growth environment, Strelzik says in a research note.
Strelzik says new locations are pulling customers away from existing Starbucks stores rather than attracting new customers, a consequence referred to in the industry as cannibilization. He says Starbucks should reconsider its U.S. development strategy to help mitigate the impact of cannibalization, while investors should lower their expectations about the pace of growth in years ahead.
“We are not arguing SBUX’s ability to grow over the long term as it likely will continue to deliver consistent (comparable sales and earnings-per-share) growth annually, but the catalyst for the stock is more uncertain and the trajectory of that growth appears likely to be slower,” Strelzik says.
Last year, Starbucks said it planned to add 12,000 new locations within five years and increase its global presence by 50 percent.
If Strelzik’s fears are justified, Starbucks strategy to focus on growth in markets outside the U.S. may be the company’s best course of action. In July, Starbucks announced that that it bought out its joint venture partners’ 50 percent ownership stake in China’s Starbucks Coffee Corp. for $1.3 billion, taking over full ownership of the company and its 1,300 Starbucks stores throughout China.
For now, at least, slowing growth may trigger…
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!