Avoid Javelins

There’s a phrase used by stock brokers – "Don’t try to catch a falling javelin."  They use this to describe a stock that has fallen recently – often a lot.  Clients will ask "XY company stock has dropped Z percent, has it beome a good buy?"  Brokers will warn the client that trying to catch that falling stock is not a safe way to invest your money.

This actually makes a lot of sense.  Just look at Starbucks (see chart here).  A high flyer, and a real Phoenix Principle company for many years, it created tremendous value for investors, employees and suppliers while creating many happy customers.  There was lots of Disruption, and White Space galore as the company prepared for slowing sales.  But in the last year the old CEO returned – and he’s doing exactly the opposite of what the company needs.  As a result value has fallen – like a javelin – and there’s really no guessing how far down it will go.

This afternoon saw a rash of reports that Starbucks’ earnings are going to decline – not just miss expectations but actually decline – for the recent quarter and for the entire 2008 year versus 2007 (read Reuters’ release here).  Even worse, same store sales have declined – meaning less is being sold in each store than last year.  Starbucks has hit a growth stall, and that bodes very, very poorly for the company.

CEO Schultz is already making a rash of excuses for lousy performance – even blaming lower sales on lower home prices and a generally weak economy (read quotes here.)  Even though it is leadership’s job to keep the company growing, especially when slowing sales are as easily predicted as this case.  While making excuses, he’s shutting at least 100 stores and pulling products out of remaining ones – like the warm breakfast sandwiches.  Let’s see, sales are down – so we’re going to remove products from the shelf.  Right, that’s the ticket!

We don’t care if customers go into Starbucks to buy a coffee, latte, sandwich, muffin, coffee mug, coffee pot, CD, DVD, beans, glasses or MP3 download!  What customers buy doesn’t matter – it just matters that we keep getting them into the store spending money!  And that’s what the last CEO focused on.  Creating new ways for Starbucks to make revenues and profits out of the existing footprint – while looking for new footprints in entertainment, grocery and liquor!  Yet, when the old CEO returned he couldn’t wait to enforce his old Success Formula on the company – 25 years later – as if the world had never changed and Starbucks was again a 30 unit franchise.  The repetitive Defend & Extend practices that worked to grow Starbucks 15 years ago are not what is now needed to keep it growing today.  Starbucks was a flying javelin, but under Mr. Schultz it’s falling out of the sky very fast indeed.  Investors had better run for safety!

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