Starbucks stock takes hit, but plan looks solid
Right about now, with听Starbucks, this market is showing how stupid it can be and how it is almost always all about the short-term trade.
After the market鈥檚 close Monday Starbucks听听to spend $100 million to buy the 19-unit听La Boulange听bakery chain.
听Coming on the heels of the company鈥檚 purchase last year of听Evolution Juice, the buzz was: Boy, to turn that into a national chain will sure take a bunch of money.
听Indeed it will 鈥� and the company said it will even be dilutive to earnings for a bit.
听Perish the thought! And that鈥檚 just what Wall Street wants to do. 鈥淲e struggle with a dilutive deal because it suggests both aggressive spending as well as a lack of operating income from the current business,鈥� said听Bank of America听analyst Joseph Buckley in a note to investors.
For traders, maybe, but for investors: Isn鈥檛 Starbucks doing what companies are supposed to do 鈥� especially if their core business is on the verge of maturing?
听Starbucks has done an excellent job expanding into consumer packaged goods (supermarkets) and retooling its own stores. It has tinkered with line expansions 鈥� via, the most notable 鈥� and it will soon be rolling out its own single-serve coffee system.
But same-store sales are likely to slow, with Hedgeye Research analyst Howard Penney expecting a 4 percent growth rate in the fourth quarter 鈥� down from 9 percent in the first quarter.
Which gets us to the brilliance of the deal: Starbucks CEO Howard Schultz is doing what any smart manager would do 鈥� seeking to diversify before the maturity of the core business is obvious. It鈥檚 unclear whether that will be one, two or three years from now 鈥� or next month.
But importantly, he鈥檚 not waiting until investors pound him for doing too little too late.
The deal, eventually, will put new food in Starbucks stores while the company attempts to work its magic with bread and the broader La Boulange concept.
It鈥檚 a calculated gamble, but that鈥檚 what Schultz is paid to do.
And based on his history, the odds would appear to be in his favor. Just don鈥檛 expect to hit the jackpot overnight.
