Consumers Fleeing Starbucks (SBUX); Still Love Chipotle (CMG)

First, I have to say I am impressed with the Chipotle Mexican Grill (CMG) team; despite a very tough macro economic environment they continue to deliver. I thought they'd be felled by now by commodity inflation and slower consumer!

• Chipotle Mexican Grill Inc (CMG) reported higher quarterly profit on Wednesday, topping Wall Street estimates, as new restaurant openings fueled higher sales at the fast-growing chain.
• The Mexican-themed, fast-food chain known for serving naturally raised meat also boosted its 2008 forecast for comparable-restaurant sales to an increase in the mid-single digits from the low- to mid-single digits in percentage terms.

Starbucks? Not so much.

• Starbucks announced it will miss Wall Street's expectations for its second fiscal quarter and it lowered its outlook for the year, citing "the sharp weakening in the U.S. consumer environment."
• The current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers," Starbucks chief executive Howard Schultz said in a statement.
• Same store sales for the quarter, which compare revenues year-over-year for individual stores, are expected to decline by a rate in the mid-single digits.

Shocker... unless you read the blog. I guess $5 coffee is a luxury many can do without as they worry about splurging for things like... rice.. or bread. (by the way folks, remember that run on rice @ Costco - it's spreading to BJ Warehouse now) Never in America right? We're too powerful and all that.

Remember January 8th? [Jan 8: Is Starbucks a Buy?] The hype was here, Starbucks (SBUX) rallied hard because the CEO was back! The CEO was back !!(small detail - he never left, he just was moved up to Chairman). The lemmings and CNBC shouted, time to buy!!! Time to buy!!! The stock was up 9% early morning, at roughly $20, when I wrote my blog entry:

Upshot - if you missed this move (i.e. you didn't own the stock yesterday at 3:59 PM) you most likely missed at least 2/3rd of the move up. Once the hype wears off, and the reality hits the stock will resume its "dead money" persona.

It peaked at $21...

In fact this was a great short as I outlined in that entry where I called Starbucks just another Coach...where is the stock now? Down below $16 in after hours. From $20 that's a nice 20% gain on a short. Summary: Don't by the hype. Think for yourself.

My conclusion (after ignoring CNBC) was...

One of the stocks hardest hit by the consumer slowdown has been Starbucks (SBUX). After all, when people are faced with choices in their budgets, one of the first things to cut back on is $5 lattes. This is the "common man's" version of Coach (COH), with all its stock struggles of late. Last night, after a relentless sell off, news came out that the original founder Howard Schultz was returning to the helm as CEO. The stock gapped up in after hours and is printing up nearly 9% in premarket this morning.

Should a person buy now that the founder is back? I say no.

1. Schultz has been the Chairman all along; it is not like he left the company and was not involved in the strategic decision
2. The saturated market in the USA for coffee shop chains did not change last night
3. In fact, McDonalds (MCD) which has hurt Starbucks with their low cost coffee made an announcement yesterday afternoon that they are expanding their coffee initiative - in fact they are hiring their own baristas in a show of how serious they are.
4. $5 coffee is a luxury not a necessity, especially when the most visited food chain in the nation is rolling out similar offering for far lower costs.
5. Milk costs, and coffee bean costs are rising as with every commodity in this world as we continue into a 'World of Shortages'
6. One need only look almost a year ago to this date at Dell Computer (DELL) - CEO Michael Dell returned like a white knight... overnight the stock jumped from $25 to $28, and then it promptly fell to $22 within a few months... a year later? $21.26.

Starbucks has been on my radar as a commodity inflation play as far back as September [Sept 5: Starbucks Warns on Higher Commodity - this Time Dairy] Funny... I sounded the same alarms then as now... only now when inflation is so in your face you cannot ignore it, are people taking notice.

That said, don't worry about all this hand wringing, CPI is only 2%.... why don't baristas understand that?

It was apparent back then, just the same - we only choose to ignore it and hide it under the rug... well the hiding under rug part we are still doing. Only now the "common folk" are not buying it anymore. Stock price in September? $28. Or 43% away from after hours print.

Just with everything people will DENY the facts on the ground until they are overwhelming. Just like they denied a recession, denied a slump in housing, denied a credit crisis (remember, stock market at ALL time highs in October 2007 AFTER we saw the first shoes falling all around us - "the Fed will save us" thinking was enough to drive the market up 2000 points). Now they deny any recession that could possibly be anything but short, shallow, and done in 6 months. It will take a few more months for the facts to overwhelm the folks in their ivory tower - these people still use government reports, printed on Kool Aid. But it will happen. Until then let's all go to Chipotle and watch this market laugh off all the problems, and cling to 'everything will be fine in 6 months'. Because if we all close our eyes, ignore reality, and hit buy buy buy button, we can together, make this market go up. It's worked so far.

No position other than admiration of Chipotle and sneering at 'the economy is fine' thinking.