Where Do Starbucks Shareholders Go From Here?

In this segment from MarketFoolery, host Chris Hill and Motley Fool Pro's Jeff Fischer discuss the situation at Starbucks (NASDAQ: SBUX), which recently revealed that it would soon shutter 150 locations -- three times more than it usually does in a whole year -- and slow the pace of new U.S. openings. And on top of that, it cut guidance.

So perhaps it's no surprise that this week saw shares hit a three-year low. What's going on behind the numbers, and what should investors be watching for next? The guys have some opinions, and they're based on the long view -- a view informed by 25 years of Motley Fool history.

A full transcript follows the video.

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This video was recorded on June 26, 2018.

Chris Hill: Last week on Motley Fool Money, we talked about Starbucks because Starbucks had a bad week last week, in terms of lowering guidance, announcing that they were going to be closing 150 company-owned stores next year, which is roughly 3X as many as they typically close. Today, Starbucks is hitting a three-year low, leading to a bunch of people on Twitter, on Facebook -- Motley Fool Podcasts has a Facebook group that anyone can join if they want -- leading people to ask, where are we now? When you look at Starbucks -- do you own shares?

Jeff Fischer: I do.

Hill: OK. When you look at this company right now, what do you see? As a longtime shareholder, in terms of the company-owned stores and the closing, that's one of those decisions that I look at and I say, "Alright, Kevin Johnson. I trust you on this." I certainly don't want under-performing stores out there. It's not that stores should be, once they're open, they stay open forever. I'd be lying if I said it didn't give me pause that they're not just closing the usual number of stores, they're going 3X.

Fischer: One thing to keep in mind is, new CEO. A new CEO is going to want to step in and start to take charge and show how things are going to be different. Part of the reason they're closing more stores -- in my opinion; they didn't say this -- is because same-store sales are suffering. One way to give those a little bit of stability is to close some that are close to densely populated stores, or ones that are obviously not doing as well as possible.

But when you have as many stores as Starbucks does have, the number of closures every year is a given, and the number of them will fluctuate. But yeah, Chris, you're right. 150 is not a massive amount, given the store count. It's surprising that in the past, it's been so low as 50. The 3X number is scary, but the absolute number isn't. I think it's just Starbucks realizing, "We have a same-store problem in the U.S., and we have a new CEO who's going to be a little more aggressive at managing the weaker store locations."

Hill: What do you think investors should be watching with Starbucks over, say, the next six months, beyond being on the lookout for further announcements like this? Is there a metric we should be watching in particular, beyond same-store sales?

Fischer: You know, that's a great question, Chris, so I hate to completely just ignore it, [laughs] but I think I will. Like you, I'm a longtime Starbucks shareholder. I haven't added to the stock for years, maybe ten years or longer, because that's how I feel about it. It's a middle-aged company, I would say. Nothing against middle-aged --

Hill: I was going to say, we're both middle-aged! Let's not come down on middle age!

Fischer: [laughs] We can be pretty energetic and keep improving all the time. But in the U.S., anyway, that's where investors are focused. The same-store sales story there is, I think, going to suffer for a while. It was so strong for so long. Remember, just a few years ago, 8%, 9%. Now it's flat, low single-digits. The challenge of getting that to grow again is significant. It would take at least a few years. The next six months, I'm just hoping same-store sales in the U.S. are stable, even if that's near flat, and that the China story keeps playing out.

China, of course, is talked about all the time now. As large as it is for Starbucks already, and as large as it will be, so far, it isn't yet enough to move the income needle. The U.S. is still really the bottom line. That's why investors react to the U.S. But, over time, China will become much more meaningful. The great thing about China is, the store economics there are such that they don't have to do as well volume-wise as U.S. stores, absolute dollar-wise, to do as well or better on the margins, the way the store economics are. It just takes time to get there.

Hill: That is good. I was reminded of something recently, and this ties into -- we're talking about Starbucks, but we could be talking about any company if you have a long enough time horizon. I was chatting with Alison Southwick, one of the hosts of our Motley Fool Answers podcast, which people should absolutely check out if they haven't already. Alison is putting together -- because this weekend marks the 25th anniversary of when David and Tom Gardner and their friend Erik Rydholm put together the finishing touches on the very first monthly newsletter of The Motley Fool and stuck it in the mail and sent it out to people.

Fischer: I have one of those issues.

Hill: Do you really?!

Fischer: Yeah. Should I put it on eBay? Is now a good time?

Hill: I was going to say, put it under glass!

Fischer: Oh, yeah, it's protected. I'll keep it.

Hill: Alison was putting together some highlights of the last 25 years. One of them had to do with Starbucks and a television appearance that David and Tom did where they were talking about Starbucks. This was in 1999 when it took a dip. You may recall, it dropped for very good reasons, because Howard Schultz got on the conference call when they had reported whatever earnings it reported. I don't even remember what the results were. I just remember that the results were rendered immaterial, because once Howard Schultz started the conference call, he started talking about how Starbucks didn't really think of itself as a coffee company, Starbucks was more of a lifestyle portal, and he was talking about starbucks.com, where instead of going and buying coffee and coffee makers, you could buy high-end furniture, all this stuff. Basically, they were going to be a .com. And, rightfully so, analysts freaked out, and the stock dropped about 30% the next day. But, Alison has the chart there. I remember that day. That was terrible.

Fischer: I do, too.

Hill: It was horrible. It was like, "Oh, my God, has Howard Schultz lost his mind?" But when you have the benefit of 20 years of time and you look, when you look at that chart now, you're like, "Oh, there's a little dip." Now, in the month of July 1999, it's a massive dip. But when you spread it out over a long period of time, you're like, "Oh, there was that dip."

Fischer: Chris, I love that perspective. You can do that with Amazon, too. We lived through the ups and downs of Amazon in its early years. 30%, 40% swings month to month. Now you look at the chart, and that was nothing. That was nothing. But Starbucks, speaking of the price, it's as inexpensive as it has been, on my chart, since 2008-09, since the Great Recession. It trades now at 20X estimated earnings for the next 12 months, which isn't cheap, but for a company of this --

Hill: This size and maturity?

Fischer: Yeah, and still growing earnings by a healthy 10% annualized, more or less. Higher than that, really. It's not inexpensive, especially for a retailer, but it's also not outrageous. It's well down from the multiples it was at a few years ago, unfortunately, and the stock has basically gone nowhere. I don't know if that says that you should buy shares if you don't have any or keep the shares you have, because they're at a 10-year low. But if you believe in the business, that's always what it comes down to.

Hill: It's good perspective to have. Certainly, it's been the case where we've been in this room talking about stocks that have dropped, and despite whatever the drop is on a given day or in a given month or even over a two or three-year period, you look at it on a valuation basis and you say, "This thing got cut in half and it's still really expensive."

Fischer: True.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN, EBAY, and Starbucks. Jeff Fischer owns shares of AMZN, FB, and Starbucks. The Motley Fool owns shares of and recommends AMZN, FB, and Starbucks. The Motley Fool recommends EBAY. The Motley Fool has a disclosure policy.