Starbucks (NASDAQ:SBUX) is once again on our radar because it was just downgraded by BMO Capital, but it was part of the downgrade research that really caught our attention and was just on CNBC. Let us be clear. This spells trouble. This news adds to the fact that there is no justification to buy at these levels. Let us discuss the downgrade, the research findings, and recent performance.
BMO Capital lowered Starbucks down to a market perform rating from its previous outperform rating. Why? Well it has taken the view that the company is seeing a worsening of existing store traffic as it continues to grow. In addition, BMO also fears that contributions from beverage innovation may have peaked (think unicorn drink frenzies no longer occurring). When we saw the news we didn’t think much of it as these upgrades and downgrades usually mean little. But when we looked under the hood we saw one point that stood out among all others.
In reference to declining traffic, there is a fear over cannibalization. When we initiated coverage we discussed the saturation effect. But the research from BMO shows that strong new store performance is a direct result of existing store traffic coming to the new stores. But that is not the key findings. BMO also measured the percentage of U.S. locations that have another Starbucks store within a one-mile radius. On top of that it looked into the average number of other Starbucks U.S. locations within that one-mile radius. The findings were fascinating. There are 3.6 Starbucks within a one-mile radius of the typical Starbuck location in the U.S. In addition, over 70% of all stores have another less than one mile away. This is pure evidence of saturation, and frankly you have to question growth on these findings.