It was back in 2014 when as an analyst I argued Starbucks was having a serious problem processing traffic in its restaurants. After spending weeks visiting Starbucks locations, I reasoned Starbucks kitchens -- and staff -- weren't equipped to handle all of the new demands being put on them by corporate (new mobile initiatives, more complicated food and drinks). As a result, the consumer experience would probably take a hit, same-store sales would slow and more would have to be done to keep employees happy. That has basically played out. While Starbucks has worked to improve these things, more needs to be done around staffing and how kitchens are laid out. Starbucks has to streamline its menu just like Dunkin' Brands (DNKN - Get Report) and McDonald's (MCD - Get Report) have done in order to improve throughput and find cost savings.
Now here's the new call that won't win me any fans among sell-side analysts: Starbucks could shock the hell out of uber bullish Wall Street with its results and guidance this coming week. All the writing is on the wall for this to happen. First, McDonald's had a killer quarter on coffee thanks to a push into premium offerings and discounts on drip. Those efforts took a bite out of Dunkin's results, and I suspect it did to a lesser extent at Starbucks. J.C. Penney's (JCP - Get Report) earnings warning -- and Amazon's (AMZN - Get Report) blowout quarter -- should remind everyone that retail traffic remained challenging in the third quarter. Starbucks isn't immune to the fundamental shift to online shopping. Sure, it has a best-in-class mobile app but if people aren't leaving their homes to shop, they may not be leaving for a $6 iced coffee. Those are a couple incredibly simple quarterly considerations that could lead to a slight earnings miss. As for guidance, Wall Street just continues to be too bullish in its estimates for Starbucks, with Wall Street looking for 14% earnings growth over the next 12 months. Given Starbucks global traffic trends and another year of employee wage inflation, Starbucks could only be a high-single digit earnings grower next year. I still don't think the market appreciates these factors on Starbucks, despite the stock's stark underperformance vs. the benchmark indices this year.
Good to see an array of deals on Monday with the markets at current lofty levels (or is it not good? Could be a sign of a market top ...). Here are several that have Wall Street talking.
- Lennar (LEN - Get Report) will become the largest U.S. homebuilder. Not a bad position to be in as millennials move out of their parents basements over the next five years.
- Another deal that makes sense as Novartis (NVS - Get Report) positions ahead of babyboomers entering their later years.
- Under heat from activist Elliott Management, Akzo Nobel (AKZOY) confirms it's looking to get bigger in the paint business.
Department Store Carnage
J.C. Penney's (JCP - Get Report) brutal earnings outlook on Friday has caused a cascade of negative reactions on Wall Street on Monday. Shame on the stock analyst that only today downgraded J.C. Penney to a sell. Meanwhile, Macy's (M - Get Report) was also downgraded to a sell and concerns raised on its dividend.
Bottom line: department stores still have 50% more stores open then they should.
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