If Starbucks stays course, shake-up is forecast
Starbucks’ top management could lose control of the company “if there are no real changes in the financial performance soon,” analyst Howard Penney writes in a report for Friedman, Billings, Ramsey this past week.
Starbucks’ brand would be “a valuable addition to many different global food and beverage companies” he says.
Penney wants Starbucks’ “growth at any cost” strategy to change and says shares will stay low until there is “an advocate for change or a bid for the company.”
Last week, Starbucks said U.S. traffic dropped 1 percent during the summer quarter. It lowered financial-performance estimates for the coming year and trimmed the number of stores it plans to open by 100 to 2,500. Starbucks has about 15,000 stores worldwide.
The store trim wasn’t enough for Penney, who questions why executives want to grow so quickly. Last spring, they announced plans for 10,000 more stores in the next four years. “What is the benefit to the company and its shareholders to get there so fast?” he writes.
Other companies have gone through similar growing pains, Penney notes, including Wal-Mart, McDonald’s and Coca-Cola. They grow quickly at first, then stumble on market forces, competition and financial missteps that cause their valuations to collapse.
Starbucks’ stock traded around $23 a share last week, near the bottom of a 52-week range of $21.77 to $37.14.
When angry shareholders demand change, he writes, “the patriarch of the company is reluctant or slow to change, which is the beginning of the end. Usually, the drama ends with there being two or three CEOs before the company gets it right.”
- Melissa Allison
Who’s green and
good? Lists disagree
Santa isn’t the only one making a list and conducting due diligence to find out who’s naughty or nice.
Good business behavior on environmental, social and governance issues is summed up these days by the buzzword “sustainability.” Because well-behaved companies are more attractive to some investors, several research groups have created indexes designed as handy guides for putting money into such stocks.
“We care very much” about these lists, says Weyerhaeuser executive Maggie McGuire. “The interest among all our stakeholders is growing that way.”
So who’s nice, and who’s not? Depends upon the index. Two local names, Microsoft and Weyerhaeuser, are on this year’s edition of the 120-company Dow Jones Sustainability Index - North America.
Meanwhile, all 10 of the biggest companies measured by market capitalization based here - Amazon, Costco, Expedia, Expeditors International, Microsoft, Nordstrom, Paccar, Starbucks, WaMu and Weyerhaeuser - made it last month into the debut edition of another list, the 272-company KLD North America Sustainability Index.
Then there’s the “100 Most Sustainable Companies in the World” list, announced each year at the economic conference in Davos, Switzerland. It includes not 10, not 2, but zero companies based here.
If Santa faced such discrepancies, surely some elves would get fired.
But here’s another problem. The way such indexes are put together virtually guarantees that plenty of companies that may be sustainable - heck, perhaps even saintly - will be excluded.
Take the KLD sustainability index, put together by a team with long-standing credentials. It helped pioneer the notion of socially responsible investing with the Domini 400 Social Index in 1990.
For starters, its methodology eliminates 85 percent of public companies because they are too small. From the S&P global stock universe with 9,280 companies, KLD discards more than 7,800 that constitute the bottom 25 percent of market capitalization. KLD Indexes manager Karin Chamberlain explains that assessing all those smaller companies would be too time-consuming.
So Green Mountain Coffee Roasters and Peet’s Coffee, together worth barely $1 billion, get tossed without consideration; who knows how environmentally or socially correct they may be? Starbucks, at $16 billion-plus, survives to get considered.
Those remaining companies are categorized by sector, assessed for sustainability and ranked.
Then the index selects companies, starting with the best, until it reaches half of the remaining market cap within that sector.
So a sector could be economically large and chock-full of polluting companies, but the best of those worst companies would still make the index.
KLD’s North America Sustainability Index winds up with 272 companies, while a wider global version has 694.
It’s not just small companies that get excluded.
Suppose you are a company whose informal corporate motto is “Don’t be evil,” and you are in the information-technology sector.
Maybe you are better on environment, social and governance issues than most of the world’s giant oil companies (just guessing here).
That wouldn’t matter, because you are judged only against other IT companies. So Google is not in the KLD index, explains Chamberlain, because after selecting and ranking 18 IT companies for sustainability, it took just 5 companies to reach the market-cap threshold.
Big disagreements show up at the top of these lists, too.
The biggest holdings of KLD’s global or regional indexes include Microsoft, British Petroleum, Johnson & Johnson, Canon and Vodaphone. The Global 100 list, produced by the well-respected research firm Innovest, doesn’t include Microsoft - and it cut the other four this year.
McGuire, Weyerhaeuser’s manager of communications for environment, health and safety, says applying for the Dow Jones Sustainability Index “is like taking a really hard test.”
This year the company answered about 100 questions and submitted 116 attachments to document its activities for that index, she says.
“The Dow is one of the most credible global sustainability indexes, and to be named to it is a big deal.”
The discrepancies among these lists don’t undermine their value for Bruce Herbert, chief executive at Newground Social Investment in Seattle, who directs something less than $100 million into socially responsible investment funds. He’s used earlier KLD lists as a tool, not as an infallible guide.
Says Herbert: “Social investing is an aspirational process, it’s not about being part of the saved or part of the damned.”
- Rami Grunbaum
rgrunbaum@seattletimes.com or 206-464-8541