Selling out of Starbucks
Doubting a long time portfolio favorite
I've been a long term holder of Starbucks and it's formed a core holding for the past 5+ years, shifting around a 2-5% position size. My belief in Starbucks has been built on multiple pillars:
A world class top tier brand with global relevance in a secular growth market: coffee.
A huge, multi year, growth story that the company can execute on: store growth, day part traffic and menu growth, mobile and brand growth.
Top notch management that's been able to execute.
The growth story incorporated increased traffic at each store, price, order amount average (ordering food as well as beverages) and overall number of stores. This growth story, the power of the brand and execution all justified a premium multiple. After yesterday's quarterly results I'm no longer confident in these three aspects.
While coffee remains a secular growth story and I still believe in the power and relevancy of the Starbucks brand, the company is clearly experiencing a local top in terms of growth. Worse, the management has been unable to pinpoint the exact cause, and blamed it on macro trends, despite these trends not impacting other similar companies (such as Chipotle, or Tim Hortons). If management can't pinpoint the problem that led not only to shrinking growth but an actual decline in sales, this is a huge red flag for me and since the stock isn't priced cheaply, does not merit its valuation and gives me cause to doubt managements ability to execute on the long term potential of the company.
Additionally, since Howard Schulz has stepped down the company has been on a 'high risk watch' as new management has had to prove themselves. Unfortunately, they have not, and given the premium valuation and concerns, Starbucks doesn't merit the opportunity cost.
The key risks to me are:
Too many price increases have driven away consumers
Lacking execution: Missed opportunities in efficiency gains, inventory management and new beverage platform launches
Decreasing brand relevancy
Valuation overhang based on the above
In the spirit of learning from my 2023 mistakes, namely what I missed with Hasbro, when management underperforms and the key thesis becomes invalidated, it's time to sell first and monitor the company for future opportunities. That's exactly what I'll do with Starbucks.
From a portfolio perspective I will keep the cash raised (~2.5%) in cash for the moment throughout the earnings season.