Daily Archives: April 13, 2008

Looking At Starbucks (SBUX) Quality, Store By Store

It has been one year since 24/7 Wall St. looked at over 40 Starbucks (NASDAQ: SBUX) from Texas to New York.

Since then, the company has replaced its CEO with the company’s founder, Howard Schultz. The share price of SBUX has dropped from almost $32 to just above $17. The big coffee house company has gone so far as to close it 7,100 stores for a period of re-training staff. There are also plans for adding new coffee-brewing machines in each location.

Starbucks has gone so far as to release a new flagship brand product–Pike Place Roast. The company has put together a relationship with Apple (NASDAQ: AAPL) for marketing iTunes. It has formed a partnership with AT&T (NYSE: T) for free WiFi in Starbucks stores.

Some on Wall St. would argue that all of these alterations are too much to change in too short a period of time–a kind  of corporate panic. With McDonald’s (NYSE: MCD) and Dunkin’ Donuts both aggressively moving into the premium coffee business, Starbucks problems are more than internal. Its market share is under withering pressure.

Recently, 24/7 Wall St. went back to look at many of the 43 stores we visited a year ago, and a dozen new ones. We visited a number of locations in NYC from Time Square to Union Square to the Upper East Side. We also looked at outlets in Oakland Country, Michigan, Palm Beach, Florida, Houston, Fairfield, Connecticut and Westchester Country, NY. We stopped by several shops in San Francisco.

We rated locations on the same seven variables as last year: waiting time, cleanliness, bathrooms, seating, inventory, staff, and ambiance. On each of these, a store got a "1" to "3" rating, "3" being the best score.

The things which changed the least were ambiance, seating, and inventory. Most stores with cramped seating or too few seats did not change. This may be a sign of management overlooking something which is not related to coffee but is important to customers. Inventory at most stores is still very good. Starbucks is almost never out of anything, a critical key for success at retailers of any sort.

Waiting time is down at about two-thirds of the stores. This has to be bad news. Workers at Starbucks are supposed to spend more time on making drinks and not less. Management has made it clear that careful brewing of each drink is critical to the "Starbucks" experience. Perhaps that is not happening at the store level. The other explanation is that there are fewer customers. That would hardly be ideal, but could certainly account for less waiting time.

Gauging the attitude of staff is clearly subjective. But, at almost all stores, it appears that employees take the company’s issues seriously, believe that the new training reminded them of how they should go about their jobs, and are trying harder to make the customer experience as good as possible.

The biggest of the problems which Starbucks can control and has not is cleanliness at stores. Nearly half of the store we visited ranked no better than "2" on this measurement, and about 20% rated only "1".The same holds true of the store bathrooms. If Starbucks is a neighborhood place to have coffee and a snack, bring kids, and have small meetings, clean stores must be absolutely critical to keeping people coming back.

Starbucks is, to a large extent, focusing on the wrong things. A new brand of coffee and new brewing machines are not going to do anything for the company’s issues if Starbucks cannot even maintain a pristine environment.

Starbucks comeback is in trouble.

Douglas A. McIntyre

Posted on: April 13, 2008 – 5:26 pm in Food, , ,

China Mobile (CHL) Backs Off Apple (AAPL) iPhone Again

The cat-and-mouse game between China Mobile (NYSE: CHL) and Apple (NASDAQ: AAPL) over the release of the iPhone in China continues. China Mobile has over 300 million subscribers and that figure is growing rapidly each quarter.

The chief of China Mobile told the world that there are no negotiations. He says the business models of the two companies like are not compatible. That probably means that Apple’s desire to share subscriber revenue from its phones is not in the cards if it wants to do business with the world’s largest cellphone company.

According to TMCnet "China Mobile Chairman Wang Jianzhou said Saturday that such business concerns have prevented the two sides from initiating talks to sell the Apple phone system in China."

The comments are a reminder that the Apple iPhone’s future in China is in trouble before Jobs sells his first handset through a carrier there. Tens of thousands of "unlocked" iPhones are sold in China, but, worse, so are a huge number of "knock-offs."

Apple is not going to get a revenue-sharing in China which means that once it does enter the market and gets access to the China Mobile customers, iPhone revenue expectations for the PC and consumer electronics will be very modest.

Douglas A. McIntyre

Posted on: April 13, 2008 – 4:24 pm in Consumer Electronics, ,

Google (GOOG): Thirty-Six Expensive Data Centers?

According to TechCrunch, Google (NASDAQ: GOOG) has thirty-six huge data centers of which ninteen are in the US.

Here are maps of the locations.

No wonder Wall St. is worried about Google’s expensives.

Douglas A. McIntyre

Posted on: April 13, 2008 – 3:47 pm in Uncategorized,

Delta (DAL) Merger With Northwest (NWA) Could Come In Days

The on-again, off-again merger between Northwest (NYSE: NWA) merger with Delta (NYSE: DAL) appears ready to go through. The deal could be hurt by the fact that the pilots have not signed up for the marriage.

According to The Wall Street Journal "They could go ahead without the support of Delta’s 6,000 pilots. Delta and its pilots remained in talks over the weekend on a new post-merger contract that would cover that group only, leaving negotiations with Northwest’s 5,000 pilots for a later day."

It sounds like the chances for a culmination are less than positive. The pilot’s union could strike either airline and other workers might well go out in sympathy wanting to make it clear that management does not have a free hand in the future of the carriers.

A prolonged strike could do tremendous damage to a new carrier, driving all of the financial benefits out of the merger.

So much for executives and boards running companies.

Douglas A. McIntyre

Posted on: April 13, 2008 – 3:22 pm in Airlines, ,

Tough Market Cannibalizes Prices Of Weakest Companies (SIRI)(GRMN)(MOT)(DELL

No rest for the weak in a market which even punishes mediocrity.

Several widely traded companies made new lows.

Firms with heavy debt and poor operating profit prospects were hit particularly hard. Sirius (NASDAQ: SIRI), which is still awaiting approval of its deal with XM Satellite (NASDAQ: XMSR), bottomed. So did Motorola (NYSE: MOT), which appears to be doing worse each quarter in core handset business. Journal Register (NYSE: JRC), the most troubled of the newspaper companies, spent part of the weak under $.20 and will be delisted this week.

Several stocks which are leaders in sectors which appear to be weakening also hit lows. Gannett (NYSE: GCI), part of the newspaper industry, found a new bottom as did PC market No. 2 player Dell (NYSE: DELL).

Stocks in some fields which had been hot up, up until recently, are beginning to be hurt, showing how fast a sector can disintegrate.  GPS company Garmin (NASDAQ: GRMN) hit a 52-week low of $44.51 after being at $125.68 in late October of last year. Wall St. is worried that consumer electronics sales could be hurt by the recession and a number of cellphone companies are adding GPS functions to their products.

Douglas A. McIntyre

Posted on: April 13, 2008 – 3:12 pm in Research, , , , , , ,

The Week In Stockhouse, April 7-11

Wall Street opened the week flat, ahead of the weeks’ earnings, despite a rise in the financial sector. Weak earnings, a dismal global financial assessment from the IMF, and deepening worries about the American economy kept U.S. stocks down most of the week. Thursday saw Wall Street boosted by a positive forecast for discount retailers. The TSX remained mostly up during the week on commodities, despite fears about the U.S. economic outlook. However, the North American markets closed down Friday on weak earnings from GE and lower-than-expected consumer confidence.

Read More »

Posted on: April 13, 2008 – 2:48 pm in Uncategorized

Market Toughens As Financials And Tech Sell-Off (C)(BAC)(GE)(JPM)(WFC)(INTC)(CSCO)(DELL)(RIMM)(AAPL)

Over the last week, both major financials and techs sold off substantially, another sign that one major sector is doing nothing to offset the other. Taken in tandem with GE’s (NYSE: GE) bad news it raises the question of whether there is any place for the market may strengthen.

During the last five trading days Citigroup NYSE: C) fell 3%, Bank of America (NYSE: BAC) was off 6.3%, Wells Fargo (NYSE: WFC) dropped 9.6%, and JP Morgan (NYSE: JPM) sold off 6.7%. Lehman (NYSE: LEH), which was supposed to strengthen after raising new capital, fell off 9.5%.

In the tech arena, Intel (NASDAQ: INTC) sold off 2.9%, Cisco (NASDAQ: CSCO) fell 4.1%, Microsoft (NASDAQ: MSFT) was down 3%. Oracle (NASDAQ: ORCL) dropped 2.5%, and Dell (NASDAQ: DELL) ran off 5.3%. Smartphone competitors Apple (NASDAQ: AAPL) and RIM (NASDAQ: RIMM) both dropped with the iPhone maker down 3.9% and the Blackberry firm fell 3.6%.

Douglas A. McIntyre

Posted on: April 13, 2008 – 2:43 pm in Research, , , , , , , , , , , , ,

Northern Trust, State Street, and WaMu Start The Bank Earnings March (STT, NTRS, WM)

This week, we’ll have an earnings onslaught from major US financial institutions for Q1 2008 quarterly results.  What investors need to grasp from these financial giants is not whether or not the companies beat estimates nor that they guide higher.  Our favorite conglomerate just dashed hopes of whether or not we are still looking for growth.  It is too soon to expect or demand an "ALL CLEAR" signal from financials at this stage.  What the investment community can stomach is bad results, lower expectations, and financial write-downs and loss provisions out of financial institutions.  As long as the results and forecasts are not signaling "at dire risk of implosion" then you will see more sighs of relief.

Tuesday we’ll get to see earnings out of Northern Trust Corp. (NASDAQ: NTRS). The estimates for the financial holding company from First Call are $0.96 EPS on $1.00 billion in revenues.  Next quarter estimates are $1.03 EPS on $1.02 billion in revenues. Estimates for fiscal Dec-2008 are $4.00 EPS on $4.00 billion in revenues.

Analysts have an average price target north of $76.00, still well above the $67.22 close on Friday.  Northern Trust Corp.’s 52-week trading range is $58.73 to $83.17.  Northern trust is more of a fiduciary bank rather than underwriting and trading firm, although they have already shown they aren’t immune from asset write-downs and other unforeseen charges.  Wall Street does not expect any horrible major implosion news here.

Also on Tuesday, we’ll get to see earnings out of State Street Corp. (NYSE: STT). The estimates for the investment servicing and managing product company from First Call are $1.30 EPS on $2.41 billion in revenues.  Next quarter estimates are $1.32 EPS on $2.48 billion in revenues. Estimates for fiscal Dec-2008 are $5.14 EPS on $9.72 billion in revenues.

Analysts have an average price target north of $90.00, above its $79.33 close on Friday.  State Street Corp.’s 52-week trading range is $59.13 to $86.55.  State Street is also more fiduciary in nature, but it has more products than Northern Trust.  But Wall Street does not expect any horrible major implosion news here.

Tuesday we’ll also get to see earnings out of Washington Mutual Inc. (NYSE: WM), and the woes here are now widely known. The estimates for the consumer and small business bank from First Call are -$0.98 EPS on $3.4 billion in revenues.  Next quarter estimates are -$0.56 EPS on $3.47 billion in revenues. Estimates for fiscal Dec-2008 are -$1.74 EPS on $14.39 billion in revenues.

Analysts have an average WaMu price target north of $14.00, well above its $10.95 close on Friday and well above that TPG-led private equity bailout at $8.75 per share.  You have to already assume that the numbers as of the end of the month looked uglier than 40 miles of bad road, with writedowns and losses looking the strapped Monopoly player that just landed on Boardwalk when hotels are on it.  This one is a given ugly gone fugly.  About all we can hope for is one more piece of the pie in establishing a wider grasp of the counterparty risk among the 40 largest financial institutions.  Washington Mutual’s 52-week trading range is $8.72 to $44.66, and the entire upper half of that 52-week range is now just as irrelevant as gold to a dead man.

Jon C. Ogg
April 13, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 13, 2008 – 10:36 am in Banking, Earnings, Financial Stocks, , ,

Earnings War: Intel Versus AMD.. Q1 2008 (INTC, AMD, NVDA)

This week, we will have the real start of the earnings onslaught for Q1-2008 earnings season.  We compiled many estimates Friday evening to see which pairs of companies and which actual leaders were coming out with earnings.  A real caveat we’d make right now is that the screw up on earnings from everyones favorite conglomerate last Friday there are going to be major analyst downward revisions in many sectors this week right ahead of the actual reports.

On Tuesday afternoon, we’ll get to see earnings out of Intel Corp. (NASDAQ: INTC). The estimates for the processor and chip giant from First Call are $0.25 EPS on $9.63 billion in revenues.  Next quarter estimates are $0.28 EPS on $9.25 billion in revenues. Estimates for fiscal Dec-2008 are $1.29 EPS on $39.8 billion in revenues.

We’d notes that Intel’s lowered guidance from recent weeks was noted mostly on its flash memory operations.  Analysts have an average price target north of $26.00.  Intel Corp.’s 52-week trading range is $18.05 to $27.99.

Advanced Micro Devices (NYSE: AMD) is also set to report earnings this week, with the number two processor company giving up its numbers on Thursday after the close.  First and foremost, AMD did warn even more recently than Intel and it announced roughly a 10% workforce cut.

First Call estimates from AMD are -$0.51 EPS on revenues of $1.5 Billion, although those estimates have come down steadily from analysts.  For the next quarter, analysts are looking for -$0.46 EPS also on $1.5 Billion in revenues.  For Fiscal-2008, it is expected to see -$1.36 EPS on $6.43 Billion, and now analysts expect wide losses in 2009 as well at -$0.64 on $7.07 Billion in revenues.

AMD’s 52-week trading range is $5.31 to $16.19, and there’s probably no point in mentioning the old $30.00+ highs before that.  The average analyst price target is $almost $8.40 on AMD.  Analysts may hope to look at ATI as being its bright spot, and one that may have a jump on NVIDIA (NASDAQ: NVDA) in graphics chipsets for 2008, and it might even be worth considering that old analysis showing the possibilities of an NVIDIA-AMD tie-up that AmTech outlined as a possibility. Lastly, it wasn’t exactly all that well regarded that AMD lost its Chief Technology Officer. Can you say turmoil?

Recently, there was talk of Intel is going to be able to launch more core-processors than its troubled rival.
Intel was recently noted as having some of its China ventures that could see IPO’s.  Intel did recently hike its dividends.

Jon C. Ogg
April 13, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at jonogg@247wallst.com and he does not own securities in the companies he covers.

Posted on: April 13, 2008 – 9:17 am in Earnings, Semiconductor, , ,

American (AMR) Flights Back To 100%, What Was Cost?

AMR (NYSE: AMR), parent of American Airlines, will return to 100% service tomorrow after FAA-mandated inspections of it MD-80 fleet forced the cancellations of over 3,000 flights.

AMR management has said that the incident will cost the carrier tens of millions of dollars.  An analyst with Standard & Poor’s estimated it could easily top $30 million," according to the AP.

The figure begs the question of how much the debacle will cost AMR. Customers may demand expense reimbursement for hotel stays and other costs which were incurred due to scrubbed flights. There may even be some class action suits for damages fliers will claim were caused by their lack of ability to travel.

Last year, AMR made only $945 million in operating income on $22.9 billion in revenue. The company had debt service of $894 million. It is likely that the rising cost of fuel and falling domestic traffic could take American to a loss in each of the next few quarters, and the expenses of the cancellations will make that worse.

At some point the carrier will have trouble meeting interest payments.

Douglas A. McIntyre

Posted on: April 13, 2008 – 6:45 am in Airlines,

Did Accounting Firms Miss The Subprime Numbers?

The New York Times brutalized the accounting industry today by suggesting that auditors should have caught bad numbers on the books of financial companies much earlier. The paper reports that "attention is turning toward yet another steward of financial reporting ensnared in the subprime debacle: accounting firms."

The viewpoint may not be entirely unfair and its goes to the heart of a question which has been raised about accounting firms on countless occasions. Why do the stewards of letters approving the P&Ls and balance sheet of firms get their analysis wrong so often?

The next question is whether the subprime crisis will cause shareholders suits against the large accounting operations, another part of the cycle of blame which hits when public companies begin to fail.

Douglas A. McIntyre

Posted on: April 13, 2008 – 5:47 am in Accounting

Apple (AAPL) Passes Citigroup (C) In Market Cap

With all of the write-offs it has taken in the past and all those it is likely to take in the future, the market rubbed more salt in the wounds of Citigroup (NYSE: C). Apple (NASDAQ: AAPL), parent of the iPod, has passed Citi in market cap.

According to Bloomberg "Even after a 26 percent decline in its own shares this year, Apple has a market value of $129.3 billion to Citigroup’s $121.6 billion."

While the Apple number may be impressive, the Citi figure shows that the bank and its peers are viewed as the equivalent of equity "junk bonds", risked investments for those intrepid enough to go into dark waters.

Who knows, by the end of quarter, if Apple does well in earnings, it may have double Citi’s market value.

Douglas A. McIntyre

Posted on: April 13, 2008 – 5:36 am in Research, ,

Merrill Lynch (MER) And Citigroup (C) Expected To Post Massive Write-Downs

Citigroup (NYSE: C) is expected to post write-downs of as much as $12 billion in first quarter and have a loss of over $3 billion. Merrill Lunch (NYSE: MER) could show write-offs of $5 billion and a loss of $2.7 billion. According to The Times, Merrill "is expected to knock a further 20% from the value of its sub-prime holdings, in spite of the fact that it announced $18 billion of write-downs only three months ago."

The paper also reports that "Deutsche Bank is attempting to offload some of its €35 billion (£28 billion) of toxic debt to a consortium of private-equity firms."

Douglas A. McIntyre

Posted on: April 13, 2008 – 5:25 am in Financial Stocks, , ,