Last time I covered three of this earnings season's success stories. Now let's look at three disappointments and what these companies need to do to get back on track.
What Starbucks did:
Starbucks reported fourth-quarter 2008 earnings per share of 8 cents. Excluding restructuring charges of 6 cents per share, Starbucks earned 14 cents for the quarter. Revenues for the coffee quick-service company were $2.8 billion. Analysts expected Starbucks to post earnings of 17 cents on revenues of $2.7 billion.
How Starbucks dropped the ball:
Same store sales declined 10%. Traffic declined by 5% and average tickets declined by 4%. Where did all those sales all go? It appears that many Starbucks' customers went to
or nowhere, cutting their regular retail coffee fix all together. Meanwhile, McDonald's reported that it generated same store sales increases of 7.2%.
What Starbucks needs to do:
Starbucks added 195 net new stores during the quarter. Starbucks plans to add 140 new stores in the U.S. and 170 internationally in 2009. Offsetting these openings in 2009 will be 1,200 store closing (600 announced in July 2008 and an additional 600 announced last month). Starbucks should scrap plans to add any new stores and reconsider its menus, especially the prices. In the U.S. Starbucks is simply oversaturated and too high-end to sustain organic growth.
The one bright spot in Starbucks' quarter was an increase in packaged coffee sales ($114.3 million). Long ago in New York City,
Chock Full O'Nuts
was the Starbucks of its day. The major difference: Chock Full O'Nuts was a low-end coffee and sandwich shop. Eventually, Chock Full O'Nuts closed its stores and focused on marketing its coffee to distributors and retailers. (Recently, the company has revisited the store business with scaled-down "Chock Café" kiosks in New York City and the vicinity.) Chock Full O'Nuts is now owned by
Massimo Zanetti Beverage USA
. It's very possible that one day Starbucks will find itself operating as Chock Full O'Nuts operates now, or perhaps some combination.
Video: Against the Grain: Sell Starbucks! (Jan. 28, 2009)
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Related Video:Starbucks: No China Slowdown (Jan. 14, 2009)
What Qualcomm did:
Qualcomm, the digital wireless telecommunication product and services company best known for its CDMA technology, earned 31 cents on revenues of $2.51 billion. The company was expected to earn 47 cents on revenues of $2.4 billion.
How Qualcomm dropped the ball:
Nearly three million less CDMA handsets were sold in the quarter than expected. The company wrote down $388 million in investment losses, offset by a licensing settlement payment received by
. Profit margins for the quarter were 29.6% versus 31.0% a year ago.
It appears that Qualcomm's product-mix shift to higher end handsets may have caught the company off guard, as more sales were being made by smartphone vendors, such as
Research In Motion
( RIMM). Qualcomm also warned that average sales prices (ASPs) are going to be down significantly in 2009.
Furthermore, Qualcomm lowered its fiscal year 2009 revenue guidance to a range of $9.3 billion to $9.8 billion versus prior estimates of $10.2 billion to $10.8 billion. This was counter to the recent tech-sector strength that we have seen from Apple, Research In Motion and
What Qualcomm needs to do:
There are two factors that will dictate future growth for Qualcomm: one within its control and one outside of its control.
What Qualcomm can control is the rollout of 4G (the next generation of mobile communications). If Qualcomm can engineer and introduce 4G chips faster and more successfully than its competitors, such as
, then Qualcomm will benefit.
What Qualcomm cannot control is the economy. At the end of the day, Qualcomm will make more money if more chips are sold, rather than if more high-end handsets are sold. The company simply needs more consumer demand to come back into the mobile market.
What YHOO did:
Yahoo! was expected to earn 13 cents per share on revenue (excluding traffic acquisition costs) of $1.37 billion. In the year-ago quarter, Yahoo! earned 15 cents per share on revenue of $1.40 billion. Yahoo! reported a loss of 22 cents a share on revenue (excluding traffic acquisition costs) of $1.375 billion.
Excluding a $108 million restructuring charge, $18 million stock-based compensation credit for headcount reduction and $488 million noncash goodwill impairment for international business, Yahoo! earned 17 cents a share. However, Yahoo! advanced revenue recognition from a deal with
, which helped to juice-up the quarter.
How Yahoo! dropped the ball:
Simply put, they were not
, which, as I discussed
, was one of the bright spots this earnings season.
Google grew earnings through click/ad market share gains. No doubt that came at Yahoo's expense. Furthermore, the distractions caused by Yahoo! founder and then CEO Jerry Yang's missteps and the failure to accept a generous offer from
caused the company to incur more expenses and veer away from managing its business well.
What Yahoo! needs to do:
New CEO Carol Bartz needs a serious plan. Bartz arrived at Yahoo! with much fanfare, almost to the extent that people proclaimed her as a savior for the company. Unfortunately, during Yahoo!'s latest earnings conference call, Bartz didn't disclose or even hint at a strategic plan for the company. She threw out plenty of soft and fuzzy words that sounded like they came straight out of a business school textbook. There was simply no substance.
Bartz better act quickly and decisively or else Yahoo! will continue to see its business erode to Google. I suggest that Bartz needs to learn how to better to monetize the company's content and services via a search/advertising platform that rivals Google's platform.
While the bad economy may be a common thread amongst the poor performance of these companies, it is not the only one. Management mistakes and a failure to understand the competitive landscape also contributed to these companies' range of failures. In the case of Starbucks and Yahoo!, management changes have been made, but as of yet, no progress. While it's not too late for these companies to turn around, there is also a chance that their fortunes will continue to deteriorate.
Here is some homework to help you identify which companies may disappoint:
Look for companies that are complacent and may be relying on old technology in an ever changing environment.
Look for retailers (and other store-heavy companies) that have over expanded and are now forced to reorganize or contract.
Notice companies that are being overwhelmed by a much stronger and evolving competitor.
At the time of publication, Rothbort was long AAPL, MCD and GOOG, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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