My feeling is that Starbucks did lose its way which is why Howard Schultz came back on board as CEO. Over the past several years the company has focused too much on new store expansion while pretty much ignoring the store atmosphere which is really what made the company so popular in the first place. I am still invested in Starbucks even though it has performed very poorly since I first bought it a year or two ago. With Schultz back in charge I feel much more comfortable with the company's ability to work through the store closings and once again bring the focus to the atmosphere and service. The transition period of these store closings and a revamping of current stores will not be easy or cheap, but I feel that in the long run it is absolutely the right move and I am confident that Schultz knows how to make it work. There's no one who understands the company more or what got the company to where it is today.

I'm not expecting much upside movement in the stock price over the next 1-2 years, so I'm certainly not jumping in at this price. I'm waiting to see how the closings go and get a better idea of what the long-term picture looks like. Financially it will most likely be a painful process in the short-term, but if management can stay focused I think Starbucks will come out of it a stronger business. Starbucks was a great business that screwed up and lost touch with its "thing". Over the next few years Starbucks will either prove that it is a great business and work through these troubles, or that the concept just isn't workable anymore.

The thing to realize is that Starbucks is still producing very strong cash flow. So while earnings growth will certainly be slowed and possibly negative in the near future, the key items to watch are cash flow production and the balance sheet. So far, the balance sheet has stayed steady and cash flow production is quite strong. As long as Starbucks can produce consistent and positive cash flow over the next couple years I'll be confident enough financially. However, if cash flow production slows considerably and/or turns negative, that would be a tempting sign to sell. But, it's impossible to predict, so for now I continue to hold my position with the hope that the Starbucks experience and atmosphere can work their way back into the stores.

On a slightly different note, I see Peet's Coffee & Tea as a very strong coffee/tea business. The company's growth has been picking up along with margins and is actually becoming a pretty strong company both financially and in terms of stores opened (I believe there are somewhere in the area of 180 stores opened). The company carries $18.1 million in cash with no debt, just recently opened a new roasting facility, has produced very strong cash flow so far this year, and like I said earnings and margins are both expanding nicely. I truly believe Peet's is a strong investment for the long run, management is experienced and so far has made some decisions that I believe will definitely benefit the company over the long-term. Let's just say that management is willing to sacrifice short-term results for the greater good (partly why the stock was so depressed for awhile). Peet's is a business that I'm very glad to own a part of and I see it as a nice way to get exposure to the specialty coffee/tea industry. It may be a good way to counter an investment in Starbucks, because Starbucks' store closings would probably help Peet's more than it hurt.

So, I'm not adding to my position in Starbucks but I'm confident that in the long run the company will come out stronger. For now we just have to take it quarter by quarter to see how this transition process is going and impacting the company financially. In the meantime, I see Peet's as a great growth opportunity and a better way to get exposure to the industry. Peet's is similar to Starbucks years ago because it is the atmosphere that attracts the customers, and management is very focused and committed to preserve and expand that atmosphere and experience. With Starbucks now doing what it's doing, I'm sure Peet's investors and management will be all the more careful going forward. Both companies are in interesting positions and I certainly am looking forward to how they both progress and compete.