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Starbucks Slips as McDonald's Jumps

Poured out coffee. Coffee stains
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Shares of Starbucks Corp. (NASDAQ: SBUX) have declined almost every day for two weeks. According to Bloomberg, this has not happened since the coffee store chain’s initial public offering in 1992. It affected its long-term stock performance, particularly against rival McDonald’s Corp. (NYSE: MCD). It has knocked $10 billion off the market cap of Starbucks since the start of December. Among the causes are estimates that its same-store sales have fallen recently. (Here are five reasons to avoid Starbucks today.)

Over the past month, Starbucks’s shares are off 6% compared to McDonald’s, which has gained 4%. Over the past two years, McDonald’s stock is up 15% and Starbucks is down 12%, while the S&P 500 has been flat over the same period.

What’s the Problem?

Starbucks dark clouds
Source: Christopher Furlong / Getty Images News via Getty Images
This was supposed to be a strong period for Starbucks and its new chief executive officer, Laxman Narasimhan. Revenue for the most recently reported quarter was 11% higher to $9.4 billion. Net income rose 10% to $1.2 billion. Comparable store sales rose 8% worldwide.

The issue shareholders have is whether recent observations about same-store sales at Starbucks are correct. No one can say for certain, outside the company, whether sales growth is slowing. If it is slowing, no one outside Starbucks can explain why.

Starbucks’ strength with Wall Street is built on a nearly endless expansion, which may be problematic. Store count reached 20,228 at the end of the last quarter, up from 18,416 in the same period the year before. Starbucks may have overbuilt, particularly in the United States. Overbuilt chains eventually face challenges in same-store sales.

Another large question is whether the unionization among Starbucks store workers will continue to expand. The current labor effort is limited to local areas. However, Starbucks has faced actions by the federal government about how it has countered the union efforts. In September, the National Labor Relations Board said management violated labor laws more than once.

Unionization can be expensive. Typically, unions fight for better wages and benefits. That can eat into the bottom line at Starbucks.

When the company announces the results of its current quarter, Starbucks stock investors will find out whether anxiety over slow same-store sales is warranted. In the meantime, those investors face the challenge of a falling share price.

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