Should I Do It? Starbucks Beaned

Starbucks' aggressive growth into international markets is seen as a positive and has been well publicized. But this could also have a negative effect on the stock, because most of the countries in which Starbucks intends to open stores are experiencing turbulent economic conditions.

Central banks in China, Russia and India, three countries that Starbucks is aggressively targeting for new stores, all have raised interest rates over the past few months due to inflation and rising oil prices. Japan, which is Starbucks' second-largest market based on store count, just raised interest rates for the first time in six years, and the European Central Bank also tightened in hope of curtailing inflation.

Starbucks' growth strategy has been challenged by analysts and investors since 1992, only to leave those doubters in awe. But this time around, I believe the sales miss should serve as a warning that the days of 10% same-store increases could be things of the past for the company. At the current price, Starbucks sports a forward price-to-earnings ratio of 34.4, more than double the S&P 500 average P/E of 16.

Over the long term, I don't see Starbucks achieving its sales forecast even if we enter a declining interest-rate environment (or even if management whips up a 10-second Frappuccino machine). For the short term, I wonder if August same-store sales also will be weaker than expected, because the average temperature so far has been higher than that of July.

Should you consider investing in Starbucks? I see much more risk than reward, so the answer is "no."

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