#10 - Spillin' the beans on Starbucks (SBUX)
What is Starbucks?
Starbucks Corp. engages in the production, marketing, and retailing of specialty coffee. Headquartered in Seattle, Washington, the company operates more than 35,000 stores across 80 countries (as of 2022). Although Starbucks was not the first major coffeehouse chain in the U.S., it was the first to both popularize and mass-distribute a particular brand of café culture. Starting in the 1990s, Starbucks began promoting coffee as a holistic experience that combined ambiance, community, function, and lifestyle. By transforming people’s perception of coffee and coffeehouses, Starbucks achieved outsize growth and established itself as one of the most dominant names in the coffeehouse industry.
Quick Stats:
Next earnings report July 25, 2024
Average Volume (30D) 11.37M
Market capitalization 90.22B
Dividend yield (indicated) 2.86%
Price to earnings Ratio (TTM) 21.94
Basic EPS (TTM) 3.63
Shares float 1.11B
Beta (1Y) .98
52-Week High (All-Time High) 107.66
52-Week Low 71.80
Daily Average True Range (ATR) 1.77
Quick Dashboard (1D):
Oscillators: Neutral
Moving Averages: Strong Sell
Summary: Sell
Earnings 2024:
Q1: EPS -3.31%, Revenue -1.79%
Q2: EPS -14.61%, Revenue -6.14
Analyst Ratings (shown in TradingView):
Based on 35 analysts giving stock ratings to Starbucks in the past 3 months, the average target forecast is $88.50. Currently a "Buy" according to these analysts.
The charts:
Using a 1W chart the first thing I notice is what appears to possibly be a massive head and shoulders pattern. For those unfamiliar with head and shoulders or H&S patterns as they're sometimes called, it's a bearish pattern. There is also a pattern known as an inverse head and shoulders pattern that is bullish however I don't see an inverse head and shoulders on the chart, I see a possible head and shoulders pattern.
However, I'm not 100% convinced that it is a H&S pattern because the price moved down toward what would be the "neckline" on what might be the second shoulder in early May only to rally toward, but not reaching, what looks like a gap fill at around $84.59. However the last week and a half or so have seen the price trend down slightly to the downside. More continuation of this with another retest of the neckline could confirm a H&S pattern. If a H&S pattern is in fact in play on the 1D chart, the price could see a significant move to the downside. Head and shoulder pattern target levels are calculated by measuring the move from the top of the "head" to the "neckline" then taking that same move from the neckline at the end of the second "shoulder" downward. What I’d like to see is more continuation to the downside with closing candles on the daily or weekly chart below the neckline to confirm the H&S idea.
The Gap fill:
On the other hand for more bullish targets there is a gap fill at $84.29 that came within less than a dollar of filling on June 4, 2024 before the price retreated. There is another gap fill on the 1D chart at $99.76
The Death Cross:
First, what is a death cross? A death cross is a pattern that uses two moving average indicators, the 50, and the 200. When the 50 crosses under the 200 it's a death cross, indicating possible movement to the downside. When the 50 crosses over the 200 it's called a Golden Cross, this indicates possible movement to the upside. SBUX entered into a death cross on the 1D chart on July 24, 2023 and on the week of April 8, 2024 on the 1W chart.
1D (Day) Chart:
1W (Weekly) Chart:
Some recent words from Howard Schultz:
Howard Schulz was a long time CEO from 1986 to 2000, again from 2007 to 2017, and then one last time as an interim CEO in 2022 until he was replaced with the current CEO Laxman Narasimhan in 2023. Schulz sat down for a three hour interview on the Acquired podcast and revealed new facts about Starbucks' early days, and gave a warning that the business is currently on the wrong path.
Schultz warned the company he built is at risk of becoming arrogant, complacent, and conservative. "The worst thing that could happen to a company is believing that you are incapable of doing anything but succeeding, and you deserve the success. But if you start playing defense and don't have the offensive mind, it won't go well. And I think over time, that has happened at Starbucks."
Schultz criticized the company for not investing enough when he wasn't in charge, and for using stock buybacks to raise earnings per share. "The company has not executed the way that I think it should have. I go into the stores, I know the company, and I think we're not at our best right now. "If the company is doing a drift toward mediocrity," he said, "I hold leadership and the board responsible for that."
Key Levels:
Gap fills at $84.29, $99.76
Unconfirmed head and shoulders neckline
Trendline
Analyst target (average) $88.50
Head and Shoulders Target $13.96
Interesting takeaway's from the Acquired podcast:
Starbucks didn't sell its own coffee early on
"When Starbucks opened in Pike Place Market in 1971, they were using Peet's Coffee. No one knows that, that's new."
Schultz said that before it began roasting its own coffee, the company brought Peet's Coffee from San Francisco to Seattle, repackaged it, and sold it under the Starbucks brand.
Italian coffee giant Lavazza turned down the chance to invest early
When Schultz was launching his Il Giornale coffee bar concept, he approached two Italian companies for financial backing but they turned him down.
"I've never told this. One is the espresso company Faema, and one is the large Italian coffee company Lavazza, and I asked them both to invest in my idea and both of them turned me down.
"Lavazza and Faema, just get that on the record, turned me down. They'll deny it. That's a fact."
Bill Gates' dad helped Schultz buy Starbucks
When Schultz was raising money to buy Starbucks from its founders in the late 1980s, one of his investors made a cash offer for the company in a bid to cut him out of the deal.
Schultz secured a meeting with Bill Gates Sr. through a friend. After the top lawyer and father of the Microsoft cofounder heard his story, he walked him over to the offices of the investor in question, Samuel Stroum, and in Schultz's telling, said: "I don't know what you are planning, but whatever it is, it's not going to happen.
Howard Shultz is going to acquire Starbucks Coffee Company, and he's never going to hear from you again." Not only did Gates see off that threat, he also helped finance Schultz's takeover of Starbucks.
Schultz regrets not snagging the rights to two innovations
When Schultz was sourcing a better coffee cup and lid for Starbucks than the traditional Styrofoam, the Chicago paper company he enlisted struck gold.
"They found a lid, that beautiful sip lid, which is now ubiquitous in the world. Howard Schultz should have said to them, 'I want an exclusive on that lid,' because that lid became the standard for the world. If I would have just understood that.
"The other thing I didn't do is we introduced caffè latte to America but we didn't trademark it. We trademarked Frappuccino later on, but we didn't trademark cafe latte. I wasn't thinking; I missed it."
Partnering with Costco and United Airlines ruffled some feathers
Costco cofounder Jeff Brotman helped finance Schultz's takeover of Starbucks in 1987 and was an early board member, and Brotman and ex-Costco CEO Jim Sinegal were mentors to Schultz, he said.
Together the trio made the "huge decision" to sell Starbucks coffee in Costco, which sparked a "revolt inside the halls of Starbucks," Schultz said.
The company saw a measurable increase in sales at stores near the Costco in Seattle, as selling beans there boosted brand awareness and store traffic nearby, Schultz said.
The former Starbucks CEO faced similar blowback when he agreed to let United Airlines serve his company's coffee.
Not a Frappuccino fan
"I'm so smart that I looked at that Frappuccino with disdain. I didn't like the name, I didn't like the beverage, I didn't think it was appropriate for Starbucks.
I just saw Starbucks as such a purity with regard to coffee and I was wrong, dead wrong, obviously."
Coke said no, Pepsi said yes
Schultz approached both Coca-Cola and Pepsi with his idea for a bottled Frappuccino to be sold in grocery stores. The meeting with Coke in Atlanta lasted less than 30 minutes: "They dismissed me, didn't understand what I was trying to do, and didn't give me much time to even explain it."
In contrast, Schultz met with Pepsi's CEO and other top executives in New York and "on a napkin, I swear, shook hands and created a multibillion-dollar business for Pepsi and Starbucks."
Steve Jobs' frank advice
Schultz recalled that Starbucks was having challenges at one point, so he took a walk with Steve Jobs at Apple's campus in California. "I just told him all my problems, everything that was going on, and he stopped me and he said, 'This is what you need to do.' He just looked at me and he said, 'You go back to Seattle and you fire everyone on your leadership team.'
"I thought he was joking. I said, 'What do you mean fire, what are you talking about fire everybody?' He said, 'I just told you, f'ing fire all those people.' He was like screaming at me in my face: 'Fire all those people, that's what I would do.' I said, 'Steve, I can't fire all those people, who's going to do the work?' "He said, 'I promise you, in six months, maybe nine, they'll all be gone.'
He was right; except for one, the general counsel, they were all gone."
Mobile app dangers
"It is the biggest Achilles' heel for Starbucks and there's not even a close second," Schultz said about the Starbucks app that allows customers to order on their smartphones.
Schultz explained the app can erode the sense of community and a shared "third place" that he sees as fundamental to a Starbucks store. It can also overwhelm workers with orders which can lead to delays, confusion, and customer anxiety, he noted.
Coffee in Italy
"I know I'm gonna be chastised for what I'm about to say, but it's true. By and large, coffee in Italy is not as good as it once was," Schultz said. "I'm going to be killed for that, but that's my truth."
Schultz also discussed how Starbucks only entered the home of espresso when it was truly ready to shine.
"I knew the knives would be out in ways that we couldn't even possibly imagine given the history and the cultural relevance of espresso and the coffee bar, and so we waited and waited and waited."
His strategy was to first open one of Starbucks' marquee locations, The Roastery, in Milan. He decided the empty post office building was the perfect venue, and upon discovering Blackstone owned it, he was able to strike a deal with the private equity titan.
Schultz also revealed the No. 1 beverage for Starbucks across its 30 stores in Italy is espresso, suggesting locals have embraced the brand.
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