A Cramer Bottom for Starbucks?

When Jim Cramer gets exorcised about something, I sit up and pay attention. As a student of market extremes, Cramer’s extremes offer their own special trading signals. At the onset of the pandemic, I wrote about “Cramer in turmoil” as a demonstration of how quickly financial narratives can change in response to market extremes, revealing the precarious balance between bullish and bearish positions during times of crisis. Such a moment may have come for Starbucks Corporation (SBUX). Has a Cramer bottom arrived for Starbucks?

Last week, SBUX plunged 15.9% after an awful earnings report. Another 2.4% loss on Friday took the stock close to a 2-year low. CEO Laxman Narasimhan braved the public spotlight and appeared on CNBC’s Squawk on the Street with Cramer and David Faber. Cramer was testy and agitated about the results. The video below ends before Cramer really laid into Narasimhan, but it provides enough of a taste of the disgust, disappointment, and outright anger about the SBUX results. In the rest of the interview Cramer might as well have yelled “SELL” as he essentially accused Narasimhan of running an awful operation. I am pretty sure Cramer wants to lobby for a new CEO!

How to Trade On A Cramer Bottom

So just how bad is Starbucks? Is it beyond repair? Is Starbucks stuck in a slow descent from iconic brand to also-ran? Has a golden opportunity arrived for the local coffee shop to retake the hearts and minds of coffee drinkers? While I cannot make these predictions, I do know an extreme when I see one. The poor results and the extreme reaction to them suggest to me that being a contrarian has more upside potential than being a seller. Typically in these situations I wait for a stock to close at a post-earnings high before jumping in; that higher close confirms that buyers are ready to pick up the pieces and suggests sellers exhausted themselves. I made an exception here and bought a small number of “starter” shares, and I will now wait for my traditional entry signal before adding.

If sellers are still in the process of abandoning Starbucks, then there are two more presumed points of support that could get me interested in future “oversold” buys. SBUX made a closing low around $70 in May, 2022 and collapsed into a pandemic-driven closing low around $56 in March, 2020. If SBUX even fails to hold its pandemic lows as support, then I will assume the stock is truly “broken.” However, I expect the company to make dramatic changes well ahead of such a calamity.

What Can Starbucks Do to Create a Cramer Bottom?

Narasimhan spent his time parrying with Cramer repeating explanations and plans that he discussed during the earnings report. Cramer was understandably unsatisfied as the narrative around the loss of occasional customers sounds like only a partial admission of business failures. The plans to market better and create new product bundles sound insufficient for getting these customers back, especially if Narasimhan is correct that the occasional customer is challenged by economic pressures (a claim Cramer vigorously refuted). From the earnings transcript from Seeking Alpha:

“…by pointing to the underlying pressures that we see consumers face, just in terms of what they have available to spend. So there’s no question that, if you take some of these transitory headwinds out, which of course, are not an excuse in any way, and you look at the underlying headwinds, particularly around the pressures that consumers face, particularly with the occasional customer, what we’re seeing is that’s where the challenge is.”

Analysts during the conference call also expressed confusion about the myriad of explanations Starbucks gave. A true mess!

ChaptGPT to the Rescue?

Thus, I decided to see whether ChatGPT 4 could improve upon the company’s plan to turn things around. I wanted to further assess the prospects for a Cramer bottom for Starbucks. The bot actually came up with one idea I particularly like (it is in bold below):

My Prompt: “Based on this earnings transcript from Starbucks, provide a specific plan for addressing the problems the company identifies and the problems that analysts identify. Differentiate between ideas that you create and ideas that come from the transcript.”

ChatGPT’s response:

Company Identified Issues:

Declining Traffic and Sales:

• Starbucks mentioned a decline in both traffic and comp sales, particularly in North America and China. The primary factors identified include severe weather impacts, economic volatility, and decreased frequency of visits by occasional customers.
• Action Plan (From Transcript): Introduce initiatives such as the Siren Craft system to optimize store operations and reduce wait times, expand mobile order and pay, and enhance the Starbucks app with new features to improve customer engagement.
• My Suggestion: Consider a targeted marketing campaign to re-engage lapsed customers, emphasizing new product offerings and the convenience of mobile orders.

Operational Inefficiencies:

• The company notes challenges in meeting peak demand, particularly in the morning, with issues around product availability and operational throughput.
• Action Plan (From Transcript): Collaborate with the Toyota Production System to enhance operational efficiency and rollout new store processes.
• My Suggestion: Further investment in training for staff on new systems and processes to ensure smooth implementation and consistent customer experience.

Competition and Market Share:

• Starbucks faces fierce competition, especially in China, where value players are making significant inroads.
• Action Plan (From Transcript): Strengthen the premium position and enhance the product mix to include more locally relevant and innovative offerings.
• My Suggestion: Develop exclusive local partnerships and limited-time offerings that can attract customers seeking unique experiences not available at competitor outlets.

Analyst Identified Issues:

Brand Perception and Misinformation:

• Analysts questioned the impact of misinformation on brand perception and sales.
• Action Plan (From Transcript): Starbucks has invested in branding efforts to correct misinformation and boost brand affinity.
• My Suggestion: Launch an educational campaign that highlights the brand’s heritage, ethical sourcing, and community involvement to reinforce Starbucks’ premium brand identity.

Consumer Spending Power:

• Concerns were raised about the cautious consumer spending patterns impacting traffic, particularly among occasional visitors.
• Action Plan (From Transcript): Introduction of value offers through the Starbucks app to attract price-sensitive customers.
• My Suggestion: Explore a tiered loyalty program that rewards not just frequent customers but also encourages occasional customers with smaller but more frequent rewards.

Implementation Considerations:

• Regularly review the impact of implemented strategies on sales and customer engagement metrics, adjusting tactics as necessary.
• Foster a culture of innovation within the company to keep pace with evolving consumer preferences and technological advancements.
• Strengthen community engagement efforts to enhance brand loyalty and local relevance, especially in competitive markets like China.

These strategies are designed to address both the operational challenges and market conditions impacting Starbucks, building on both company initiatives and addressing analyst concerns with innovative solutions.

My Impressions

Overall, ChatGPT did a great job in summarizing the situation for Starbucks and identifying the key points from the earnings transcript. I continue to think of new ways to use ChatGPT to effectively evaluate content; this process looks promising. The predictable structure of an earnings report provides a rich canvass for an AI to process content. Note that ChatGPT did not pull random items from the wilds of the internet and delivered some thoughtful suggestions.

Conclusion

There is an irony in Cramer’s angst about Starbuck’s CEO. Last year, he looked forward to Narasimhan’s potential. Faber lauded Narasimhan’s resume. Things have certainly turned 180 degrees!

Anyway, Starbucks management will not turn to AI for answers of course, but I liked this exercise as an exploration of the potential for AI to contribute to a portfolio of ideas. Time will now tell whether the response to the current extremes will be sufficient to carve out a Cramer bottom for SBUX. Given SBUX last topped out well short of the 2021 all-time high, I suspect SBUX’s return to glory, if it is coming, will be a long road ahead. For the short to intermediate-term I am limiting upside targets to a test of downtrending 50DMA resistance (the red line in the stock chart above).

Be careful out there!

Full disclosure: long SBUX