Remember when your favorite coffee shop used to feel like a warm hug in a cup? Well, Starbucks (NASDAQ: SBUX) just decided to give itself a very different kind of makeover – and investors are about as thrilled as someone who ordered a venti and got a tall.
The Seattle-based caffeine empire announced it’s closing 1% of its North American stores this year. That’s roughly 434 locations getting the axe out of their 18,734 total spots. But wait, there’s more! They’re also saying goodbye to about 900 corporate employees – not the baristas who know your order by heart, but the folks in suits who probably never learned how to spell “macchiato.”
CEO Brian Niccol is calling this a “$1 billion turnaround plan,” which sounds impressive until you realize that’s also how much this whole operation is going to cost them. It’s like renovating your kitchen and discovering you need to rebuild the entire house.
The Numbers Don’t Lie (Unfortunately)
Here’s the tea (or should we say coffee?): Starbucks’ last quarter saw revenue grow by a modest 3%, but same-store sales dropped 2%. That’s corporate speak for “people are buying less coffee from us, but we opened enough new stores to make it look okay.” Meanwhile, earnings plummeted 47% because, surprise, turnaround plans aren’t cheap.
The company is breaking down their billion-dollar bill like this: $150 million for employee separation packages (fancy talk for severance), $400 million for getting rid of store assets (all those fancy espresso machines don’t move themselves), and $450 million for lease costs from closed locations. That’s a lot of lattes they’ll need to sell to make up the difference.
The Silver Lining in Your Coffee Cup
Before you panic about your local Starbucks disappearing, Niccol promises they’re investing in “green apron partner hours” and “exceptional customer service.” Translation: they want to put more actual humans in the remaining stores and maybe get your order right the first time.
They’re also planning to renovate about 1,000 stores next year, presumably to make them look less like airport waiting areas and more like places you’d actually want to hang out.
Should You Buy the Dip?
Starbucks stock is down 9% year-to-date and 15% over the past year, but it’s still trading at 36 times earnings. That’s not exactly bargain-basement pricing for a company that’s essentially admitting it needs to shrink to grow.
Most analysts still rate it as a buy, but with Q4 earnings coming October 29 (and that billion-dollar restructuring bill hitting the books), don’t be surprised if the stock price gets as bitter as an over-extracted espresso shot.
The bottom line? Starbucks is betting that fewer, better stores will brew up more profits. Whether that strategy percolates into actual results remains to be seen. In the meantime, maybe appreciate your local Starbucks a little more – it might not be there forever.