Gloria,
Thanks for this info. The problems you relate might have something to do with how Starbucks has been dealing with high cost coffee this year.
Let me explain. In mid 94 green coffee soared from 80 cents to 240 cents per pound. This was due to a frost in Brazil. The price of coffee began to drop almost immediately and by the beginning of 1996 was about 100 cents. Because of fixed cost purchase contracts and the time it takes for coffee to move through their inventories, Starbucks only began to feel the pinch at the start of this fiscal year (Oct. 1995).
Starbucks did several things this fiscal year to compensate. They raised prices. They sold their interest in Noah's Bagels for a one-time gain. And they cut back on something called "Store Operating Expenses". Next to Cost of Sales, Store Operating Expenses is their largest cost. I've noticed that Starbucks uses Store Operating Expenses as a "shock absorber". Whenever Cost of Sales is up, they reduce Store Operating Expenses by an equal amount. This year they have had to cut Store Operating Expenses to avoid showing a year over year decline in earnings. Store Operating Expenses includes things like advertising, wages, promotions, etc.
The problems you mention may be an inevitable result of the stresses caused by cutting costs to offset higher coffee costs. However, after the end of the 4th quarter, the high cost coffee will have been passed through. Starbucks will then be able to increase their Store Operating Expenses. Perhaps that will help to alleviate some of the problems you mention. Or maybe the problems are more profound. Regardless, the information you bring is "gold" to me. There are no Starbucks where I live so I can't get any of this kind of information.
I am watching the situation closely and will keep you informed of when I think the timing is right to go short. Be forwarned, however, shorting a pyramid scheme is perilous. They keep going up until they finally explode. Your timing must be good.
Rod |
