Coffee Stocks Get a Case of the Jitters
The 1,145-store Starbucks Corp. (ticker symbol: SBUX) proved that the public’s fancy for gourmet coffeehouses isn’t a fluke. But judging by the stock prices of its rivals--all of which are considerably smaller--the public’s taste for such coffee retailers isn’t universal, either.
Stocks of java joints other than Starbucks have been pummeled over the last 12 months, battered not only by fierce competition--it seems as though there’s an upscale coffeehouse on every other block now--but by the recent surge in prices of raw coffee.
For instance, Coffee People Inc. (MOKA), a 24-store chain based in Portland, Ore., has tumbled more than 20% in the last year to $6.50 a share now on the Nasdaq market. Diedrich Coffee Inc. (DDRX), an Irvine-based operator of about 45 outlets, went public last September at $9.50 a share but has since plunged more than 60%, to $3.75.
Matters aren’t much better up north. The stock of Canadian-based Second Cup Ltd. (SKL), which owns the Gloria Jean’s chain in the United States, is down 25% from a year ago on the Toronto Stock Exchange.
Starbucks itself has been nicked by the rise in coffee prices, which have soared more than 70% in the last three months because of tightening world supplies. The Seattle-based company’s stock, though up about 31% from a year ago, has skidded 17% since mid-February to $30.625 now on Nasdaq.
By its sheer size, Starbucks has the economies of scale to absorb higher coffee prices better than others peddling lattes and cappuccinos. But prices rose so steeply so fast that even Starbucks had to respond, which it did March 14 by raising its own prices by a nickel a cup.
“We waited as long as we could,” the company said.
That move will help cushion Starbucks’ profit, and that’s why some analysts promptly told Wall Street that they remain bullish on the stock--even though it’s still trading at a stiff 40 times its expected earnings per share for 1997.
Among the boosters is Laura Richardson, analyst at the regional brokerage firm Pacific Crest Securities in Portland, Ore. Higher coffee prices or not, she likes the way Starbucks is leveraging the success of its stores and brand name by making its drinks available in selected airports, cafeterias, airlines and other locales.
“There’s opportunity for growth beyond their retail operations,” she said. “They have people coming to them to sell Starbucks coffee.”
That’s also why buying Starbucks’ stock is vastly different than, say, buying coffee futures and merely betting on the direction of java prices, she said. “Starbucks coffee isn’t a commodity,” Richardson said.
Starbucks is also selling coffee drinks and ice cream in supermarkets under its brand name. Similarly, restaurant companies from Marie Callender’s to Wolfgang Puck sell items in the frozen-foods section of supermarkets. This kind of brand-name leverage is a familiar marketing technique, and many other companies have used it successfully. A well-known example was when disposable Bic pens were leveraged to sell disposable Bic shavers.
Meanwhile, other coffee players must compete not only with the popularity of Starbucks but with the sea of smaller, closely held chains and mom-and-pop coffeehouses that have sprung up in response to Starbucks’ growth--outfits such as Peet’s Coffee & Tea in the San Francisco Bay Area and Coffee Bean & Tea Leaf in Southern California.
Naturally they’re also fighting with supermarkets, which are carrying an increasing variety of gourmet or specialty flavors.
And a shakeout has already started. Brothers Gourmet Coffees Inc. (BEAN) a year ago shed its retail operations to focus on being a wholesaler--that is, supplying coffee for the other guys. Among the units it cast off: the 230-store Gloria Jean’s coffee chain, which was sold to Second Cup and gave the Canadian company a foothold in the U.S. market.
But the change in direction didn’t prevent Brothers Gourmet, based in Boca Raton, Fla., from posting a 1996 loss from operations of $3.1 million (excluding one-time gains and charges) on sales of $72.6 million, and its stock is down 38% from a year ago to $2.50 a share.
Other publicly held coffeehouses are also hurting, and their stocks--many of them thinly traded and not followed by Wall Street analysts--are sagging badly.
For instance, there’s Java Centrale Inc. (JAVC), a Sacramento-based operator of gourmet cafes whose stock has melted to just 44 cents a share. In the nine months ended Dec. 31, the company lost $2.2 million on sales of $12 million.
New World Coffee Inc. (NWCI), which operates 40 coffeehouses in the Northeast, is also struggling. Its stock has fallen 68% from its 52-week high, to $1.625 a share, and the company lost $5.7 million last year on sales of $11.3 million.
However, New World has been making acquisitions and contends its performance is improving, demonstrated by the company achieving positive cash flow in the fourth quarter of 1996.
Diedrich Coffee, meanwhile, had to overcome a problem besides rising coffee prices. Boston Group LP, a Los Angeles-based investment firm that took Diedrich public and was a key market maker for its stock, ran into its own financial woes last month.
That forced Boston Group to curb its operations, and Diedrich and other stocks that the firm had nurtured fell sharply. Boston Group has since gotten a capital infusion and resumed normal operations.
Times staff writer James F. Peltz can be reached at james.peltz@latimes.com
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Java Jolt
Stocks of gourmet coffee chains have been pummeled by soaring bean prices and stiff competition. A look at the publicly held players:
*--*
Ticker Monday Change from Stock symbol price 52-wk. high Outlets Brothers Gourmet BEAN $2.50 --46% * Coffee People MOKA 6.50 --31 24 Diedrich Coffee DDRX 3.75 --69 46 Java Centrale** JAVC 0.44 --73 86 New World Coffee NWCI 1.63 --68 40 Starbucks SBUX 30.63 --24 1,145 S&P; 500 --7
*--*
Coffee futures per pound, Monday: $1.79
Starbucks stock, weekly closes, Monday: $30.63
* Supplier to retailers
** Includes 52 Paradise Bakery & Cafe outlets
Ties That Bind?
Coffee futures and Starbucks stock have often been interrelated. Higher coffee prices can squeeze profits at a retailer like Starbucks--indeed, they were blamed for Starbucks’ fall in price in February. In the long run, analysts say, Starbucks is learning to use its brand name as a value in itself, which may help free the coffeehouse company’s stock price from tight binds to the price of beans.
