Is trouble brewing for Starbucks?

Like a lot of companies operating at the mercy of the mighty consumer, Starbucks (SBUX) is seeing tough times.

Not only are its customers stretched thin due to high gas and food prices, but SBUX’s margins are shrinking because of higher costs for important ingredients like milk.

Competition is on the rise as well, with McDonald’s (MCD) making a big push to try to take precious market share away with their introduction of their premium roast coffees at more than half the price of a grande-double-shot-mocha whatever.

Starbucks announced that it will close 600 underperforming stores in the U.S. between the end of July and the middle of 2009 with about 12,000 workers being affected.

The company didn’t specify which stores were slated for closure but noted about 70% of them have opened since 2005.

Way Too Much Coffee

Even with CEO Howard Schultz returning earlier this year to right the ship after some corporate missteps, like aggressive over-expansion and disappointing breakfast offerings, I’m still skeptical.

Starbucks admitted that a “vast majority” of stores were opened near an existing company-operated store and weren’t expected to be profitable in the foreseeable future.

In fact, between 25% and 30% of the stores’ revenue is cannibalized when a new store opens up nearby. So the store closures should help return some of that revenue to existing stores. (To find out which industry has not been affected by poor consumer sales, check out “Retail Steals for Summer Profits.”)

Starbucks still plans to open new stores in fiscal 2009 but will cut the number in half to fewer than 200. The weakening U.S. economy is hastening the company’s turnaround. The sooner, the better, in my opinion.

Wall Street cheered the news and shares rallied higher in after-hours trading, but this is no time to celebrate. Keep in mind that hedge funds, like vultures flying over a wounded carcass, have made a killing attacking companies like Starbucks. 

They know how to pounce when a stock is down by shorting heavily. 

I expect that gameplan to be followed here as SBUX is very much wounded. 

The news of drastic cuts makes sense but only confirms weakness.

I would sell SBUX until shares hit the single digits. Use any upswings as an opportunity to cash out.

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