STARBUCKS SPARKED A premium-coffee revolution, which now threatens to devour the world’s largest coffee-house chain. With Dunkin’ Donuts, McDonald’s (MCD), the local deli and even Target (TGT) getting in on the act — and that’s just a partial list — Seattle-based Starbucks (SBUX) has found itself saddled with rising costs, declining revenue, a sinking stock price and customer fatigue. The crisis has returned founder and Chairman Howard Schultz to his role as CEO, with an imperative to “significantly differentiate” Starbucks from a whole latte competition.
Schultz, 55, is answering customers’ calls for healthier dining options with a revamped menu that includes oatmeal and fruit smoothies. He’s taken steps to enhance the “coffee experience” at Starbucks cafes, while promoting the company’s social-action endeavors at home and abroad. And he’s cutting stores and costs in the U.S. while stepping up international expansion. “We have the resources and the tools to execute on a well-thought-out plan,” Schultz told Barron’s in a recent interview.
So far, Wall Street isn’t even nibbling on the story, especially now that a sour economy threatens to make a Caramel Macchiato a capital expense. Starbucks shares have plummeted more than 60%, to a recent 15, from a peak of 40 in November 2006, and show little sign of regaining their buzz.
Yet, investors may be too dismissive of Schultz and his company, especially in view of Starbucks’ history of innovation and growth. A year from now consumers may be feeling richer, and Starbucks will be running smarter. The combination could help lift the shares by as much as 20% to 30%.
“There’s a lot more upside than downside” to the stock, says Scott Chapman, a partner and portfolio manager at Lateef Investment Management in Greenbrae, Calif., which started buying Starbucks shares a few months ago. Chapman thinks the company will benefit from the recent decline in oil and gasoline prices, among other things.
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