No Rally For Starbucks (SBUX)

At yesterday’s annual meeting Howard Schultz, founder of Starbucks (NASDAQ: SBUX), said he would fix the company or die with his boots on. He may wanted to be fitted for an extra pair. It looks like he will be waiting a long time.

Mr Schultz said he would do a number of things. Starbucks plans to start a social network. He may want to hire Governor Spitzer’s girlfriend to get a few people to join. All the usual suspects are on Facebook or MySpace.

The company is also going to grind its coffee on the spot. Customers will know it is fresh, which may be important to some of them. Machines will also be built lower to the ground so that the workers and customers can see each other. It also reduces wind resistance and saves on gas.

Starbucks has two very simple problems, and neither was addressed by Schultz. The product is too expensive. The reason people go to McDonald’s (MCD) for coffee is not that it tastes much better. It is just cheaper.

Starbucks also has to do something about the number of stores it has in the US. That figure sits at about 7,400. Doing the math about which ones have low yields is not hard. In some big cities, there are three or four Starbucks within clear sight of one another.

The market knows all of this. The stock is up only 1.5% and still trades near its 52-week low.

Schultz is a gradualist. The company needs someone who can draw to an inside straight.

Douglas A. McIntyre