A Wake-Up Call From Starbucks

Is there a problem brewing in latte land?

Starbucks Corp.’s stock, a spectacular performer in the last six years as Starbucks’ gourmet coffee shops proliferated, plunged 14% on Friday after the company said it expects earnings for the current quarter to be at the low end of analysts’ forecasts.

The stock tumbled $7.50 a share, to $47.88, in heavy trading on the Nasdaq Market, wiping $650 million from the value of investors’ holdings.

Observers quickly noted, however, that Starbucks’ comments--which came in a teleconference with analysts Thursday afternoon--did not signal a basic weakness in its business. Rather, it was meant to caution some analysts who had an overly optimistic outlook for the Seattle-based company, they said.

Starbucks, while declining comment on its stock’s action, also remained bullish about its outlook.

“This business is as strong today as it has ever been,” Chairman Howard Schultz said in the teleconference, which followed the release of the company’s fiscal third-quarter results.

Even so, Starbucks’ stock had surged so much already--before Friday it was up 44% for the year so far--and was trading at such a lofty multiple to its anticipated earnings that even a whiff of a slowdown in its blistering growth was enough to send the stock sharply lower.

“The fundamentals are intact,” said analyst Mitchell Speiser of Lehman Bros. in New York. “But there were estimates out there that were not realistic and were finally brought down to earth.”

Even after Friday’s setback, Starbucks--whose sales will top $1 billion this year--is not a stock for the squeamish. It’s still trading for more than 50 times its expected earnings per share for fiscal 1998, and about 40 times its anticipated fiscal 1999 profit.

Those are levels nearly twice as high as the general stock market, as measured by the Standard & Poor’s 500 index.

All from selling coffee drinks and assorted snacks to 7 million customers a week. Starbucks currently operates 1,778 stores, including 117 outlets outside North America, and it still has aggressive expansion plans.

Schultz said the 27-year-old company plans to have 500 stores in Europe and another 500 in the Pacific Rim by the end of 2003. It’s also been making acquisitions. In May, it bought Seattle Coffee Holdings Ltd., a British retailer.

But Starbucks also is the latest company to illustrate the risks of a stock market that’s hovering near record highs. Stocks such as Starbucks have rewarded investors with substantial paper profits this year, so when there’s any development that could diminish the stocks’ outlook and impinge on those profits, investors tend to get out quickly.

“This is a valuation issue,” said John Rogers, an analyst at the investment firm D.A. Davidson & Co. in Portland, Ore. “Starbucks is still putting up very good growth, but the question is how much do you want to pay for that growth?”

A lot less, investors decided Friday after the company said it’s more comfortable with the low end of analysts’ earnings estimates for Starbucks’ fiscal fourth quarter ending Sept. 30.

The estimates range from 26 cents to 32 cents per diluted share. Starbucks earned 22 cents in the year-earlier quarter, so profit of, say, 26 cents this year would show an 18% gain. That’s not shabby, but it’s not the sizzling growth investors had come to expect from Starbucks.

Indeed, Starbucks on Thursday announced that its fiscal third-quarter profit--excluding costs related to the Seattle Coffee purchase--soared 47% from a year earlier on a 37% jump in revenue.

The company also said that in the first nine months of its fiscal year, its same-store sales--those of outlets open at least a year, and the retail industry’s main gauge of prosperity--rose a healthy 6% from the same period in fiscal 1997.

Lehman’s Speiser said that despite Starbucks’ warning, he still expects the company to earn 29 cents a share in the fourth quarter, a 32% jump from a year ago, and to post an additional 35% earnings gain for fiscal 1999.

It’s that kind of growth that’s powered Starbucks’ stock since it went public in mid-1992. Since then, the stock has skyrocketed nearly tenfold, or an average of 46% a year.

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Roasted

The highflying shares of Starbucks Corp. suffered a sudden, sharp drop after the chain of gourmet coffee stores forecast fourth-quarter profit at the low end of expectations. Weekly closes on Nasdaq:

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Friday: $47.99, -$7.50

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Source: Bloomberg News