Starbucks stock takes hit, but plan looks solid
Starbucks stock falls after the company announced it was going to buy La Boulange bakery chain. But Starbucks stock could benefit by diversifying into food.
Right about now, with 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’s close Monday Starbucks announced plans to spend $100 million to buy the 19-unit La Boulange bakery chain.
Coming on the heels of the company’s purchase last year of Evolution Juice, the buzz was: Boy, to turn that into a national chain will sure take a bunch of money.
Indeed it will — and the company said it will even be dilutive to earnings for a bit.
Perish the thought! And that’s just what Wall Street wants to do. “We struggle with a dilutive deal because it suggests both aggressive spending as well as a lack of operating income from the current business,” said Bank of America analyst Joseph Buckley in a note to investors.
For traders, maybe, but for investors: Isn’t Starbucks doing what companies are supposed to do — especially if their core business is on the verge of maturing?
Starbucks has done an excellent job expanding into consumer packaged goods (supermarkets) and retooling its own stores. It has tinkered with line expansions — via, the most notable — 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 — 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 — seeking to diversify before the maturity of the core business is obvious. It’s unclear whether that will be one, two or three years from now — or next month.
But importantly, he’s 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’s a calculated gamble, but that’s what Schultz is paid to do.
And based on his history, the odds would appear to be in his favor. Just don’t expect to hit the jackpot overnight.