Trouble brews for Starbucks as its stock slides 12 percent Gourmet coffee chain has slow sales growth, expects low earnings

August 01, 1998|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF Bloomberg News contributed to this article.

Seattle-based Starbucks Corp., which reported slower-than-expected sales growth for July, saw its stock weaken yesterday for the second time in a week.

Yesterday's 12 percent drop to $41.875 a share reflects concerns about the gourmet coffee retailer's ventures to extend its brand, rather than signaling a slowdown in consumers' consumption of specialty coffee drinks, analysts said.

"The businesses they're going into that are not retail store-oriented are ramping up a little more slowly than expected, and the costs associated with them are greater than expected," said Andy Barish, an analyst with BancAmerica Robertson Stephens in San Francisco.

Sales at Starbucks stores open at least a year edged up 2 percent last month compared with a year earlier, the company reported yesterday. Analysts had anticipated growth of up to 5 percent. Starbucks sells its coffee drinks and beans and pastries at more than 1,800 outlets.

Shares had fallen 14 percent a week ago, after the retailer warned when releasing its third-quarter earnings that fourth-quarter and end-of-year earnings would likely fall at the lower end of forecasts. That would mean a slower pace for Starbucks, whose earnings have grown an average 32 percent in each of the past four years.

Third-quarter earnings fell 44 percent to $7.9 million, including one-time costs from the company's purchase of Seattle Coffee Holdings Limited, a retailer and roaster of specialty coffee in the United Kingdom. Excluding those costs, earnings were $20.9 million.

The company has begun selling its whole-bean coffee and bottled Frappucino in supermarkets and has introduced Tiazzi, a juice/iced tea drink in its stores and other retail outlets.

But the Tiazzi product was launched later last month than originally planned and failed to have the anticipated effect on sales, said Mitchell Speiser, an analyst with Lehman Brothers in New York. The company also scaled back on its television marketing, he said.

"It is just one month, and I don't expect it to be a trend," Speiser said. "But it has sprinkled some skepticism on their ability to meet earnings growth forecasted.

"They have to show they can continue to extend the brand beyond traditional hot coffee beverages," he said. "That's where they're up to, attempting to build a brand from a coffee shop. The question is, can they sustain very rapid earnings growth, which is what is expected."

The drop in Starbucks' stock means "it's coming down to more of a fair value," he said. "But I think improving trends going forward can serve to lift the stock price again."

Analysts also said Starbucks' plans to open more stores may not pay off.

"They're pursuing an avenue that may not bring them the reward they anticipate -- adding new locations when you already have a saturated and relatively mature market," said BevMark Llc President Tom Pirko, a beverage-industry consultant. "It's like overbuilding. It's far less a growth business than it was a couple years ago."

But others maintain that coffee retailing is still a high-growth area.

"Coffee beverages are being increasingly accepted as the category is growing," Speiser said.

Local coffee shop owners and managers said despite Starbucks' warnings, their coffee-drink business is booming.

"It's better than it's ever been," said Steve Rowell, manager of 7-year-old Daily Grind in Fells Point. "It started as a trend but people have really grown to appreciate good coffee."

Tom Thompson, owner of The Coffee Mill, which has two Baltimore wholesale and retail stores, said customers are buying less whole-bean coffee but more by the cup. Because of that, he plans to expand his coffee kiosk business.

At Ze Mean Bean Cafe in Fells Point, owner Yvonne Dornic said she has increased business by evolving as customers' needs have changed. She has expanded the menu and added entertainment.

"It's not just the draw of the coffee," Dornic said. "The draw of the coffeehouse is as much ambience and social atmosphere. The fad is wearing off on just the specialty coffee itself, but the coffeehouse idea is still on the uprise."

Pub Date: 8/01/98

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