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Is It Finally Time to Ditch Starbucks Corp. (NASDAQ:SBUX)?

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Howard Schultz retired as CEO of Starbucks Corp. (NASDAQ: SBUX ) for the second time in April. Since then the stock has lost 5% of its value. As our Vince Martin notes, it still has huge problems. It's not cheap , even after its recent fall. A founder's retirement is a dangerous time for any company, especially a retailer. Their successor almost never measures up, at least in the public imagination.

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The second quarter earnings, which I saw as a mixed bag , were eventually seen by the market as a disaster, the stock continuing a reversal from its highs of early June, when it hit $64 per share.

The problem, as it was the last time Schultz left in 2000, is growth, or the lack of it. Revenues grew almost 50% in the last three full years under Schultz. They are currently on pace to grow in the mid-single digits.

Retrenchment Everywhere

Schultz may deserve some blame for what's happening.

A host of innovations he initiated - buying Evolution Fresh for fresh juices, La Boulange bakeries for baked goods, Teavana for tea - have bombed. The idea of turning the stores into wine bars in the evenings quietly was dropped.

The one "success" is one Schultz remains personally involved with, high-end Roasteries and Reserve coffee shops meant once again to position coffee as a luxury drink and not a daily necessity. The company's digital strategy, getting coffee-ordering apps to drinkers before competitors, has delivered its biggest kick to the numbers.

Competition is also heating up. Rivals like Dunkin Brands Group Inc. (NASDAQ: DNKN ) and JAB Holding, the privately-held Luxembourg conglomerate that under Olivier Goudet has snapped up all its main competitors, from Caribou to Keurig to Einstein Brothers and Panera Bread, are becoming more aggressive.

Hope for Starbucks in China?

The biggest move made under Schultz successor Kevin Johnson , a former Microsoft Corp. (NASDAQ: MSFT ) executive who came to the company from Juniper Networks Inc. (NASDAQ: JNPR ), has been the China deal, in which the company took control of its mainland stores and dumped those in Taiwan.

Starbucks thinks it can double its China volume in five years, but skeptics are already questioning its strategy there, noting that the high end is saturated and it's missing out on delivery. Starbucks has begun supporting mobile payment apps there , using the same mobile-first and order pick-up strategy that succeeded in the U.S. market.

Another problem for Starbucks is Donald Trump. Schultz is sometimes called the "liberal Donald Trump" and conservatives have put a target on his back , with some even boycotting the company.

Regardless of domestic politics, Starbucks represents America, and American values, when it goes to China, just like other icons such as McDonald's Corp. (NYSE: MCD ) and The Coca-Cola Co. (NYSE: KO ). When America's reputation declines, so do the reputations of American companies operating there. Both McDonald's and YUM! Brands Inc. (NYSE: YUM ), which owns Kentucky Fried Chicken and Taco Bell are exiting the market andselling stores back to Chinese nationals.

No Longer Special

There's one other problem that this Starbucks customer has noted in recent visits. While sold as a luxury, Starbucks is no longer special. Its roadside drive-throughs are ubiquitous, and most of its drinks are heavily sugared, as unhealthy as hamburgers and French fries. That's not where a luxury brand wants to be.

I have been a Starbucks stockholder for several years and, with dividends reinvested, I have some fat gains. But I unloaded half my position in July, at $58.50, and may sell the rest soon, unless Johnson can convince me he has a growth strategy that involves something other than finding more ways to shovel sugar down consumers' throats.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn . As of this writing he owned shares in SBUX and MSFT.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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