Starbucks loses steam as sales growth slips

Fund manager Shawn Price passes by three Starbucks Corp. coffee shops on his way to work every morning — and as an investor in the chain, that worries him.

Concerned the chain is starting to saturate its lucrative U.S. markets, Price has sold about half his Starbucks stake since December.

And he’s not the only one.

Following a run-up of nearly 90 percent in 2004, Starbucks share price has fallen 22 percent this year — largely due to concerns that the stock is overvalued and the days of supercharged sales increases are over.

For most of last year, Starbucks posted double-digit monthly percentage gains in sales at coffee shops open at least 13 months, a key retail measure known as same-store sales.

“At what point can you not grow at that rate?” asked Price, who manages $1.2 billion in large-cap assets, including the Touchstone Large Cap Growth Fund.

Since December, the monthly percentage increases in Starbucks’ same-store sales have slid into the single digits.

Company warned on same-store sales
Certainly Starbucks itself can’t be accused of misleading investors after repeatedly warning that double-digit same-store sales increases are not sustainable.

For the rest of the year, the company has said it expects same-store sales increases to fall at the high end of its long-term target for growth of between 3 percent and 7 percent.

Analysts blame higher costs and difficult comparisons with last year’s results, among other factors, for the slowdown.

Starbucks now makes up about 1.85 percent of the Touchstone fund, down from 3.6 percent at the end of December.

Price said he can envision the day when the stock falls completely out of the fund as the company matures to the stage where it’s no longer as appealing as a growth stock.

‘Trading above fundamentals’
The stock’s rich valuation, which investors have said is justified by the chain’s double-digit sales growth over the last decade, has long been a source of debate on Wall Street.

The stock currently trades at about 42 times analysts’ average 2005 earnings estimate, compared with a valuation of about 16 times earnings for McDonald’s Corp. shares.

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Starbucks’ valuation is still above its four-year average of about 37 times earnings, according to J.P. Morgan analyst John Ivankoe,

Coldstream Capital Management, a Bellevue, Washington-based investment firm, also has cut back its Starbucks stake, according to Chief Investment Officer Donald Gher.

“It was clearly trading above the fundamentals,” Gher said in an interview. “In December, when the stock ran up, we took some money off the table.”

Gher could not say how much Starbucks stock Coldstream sold, but he noted that the firm still owns about 195,000 shares and has bought some back as the price has dropped.

“You’ve taken a lot of the year-end fluff out of it,” Gher said. “At this level, it does appear attractive to us for the long term.”

Many analysts, however, think Starbucks shares are still too expensive. Several reiterated that belief last week after the company Wednesday reported a same-store sales increase for March of 6 percent, which fell short of Wall Street forecasts.

‘Valuation concerns’
CIBC analyst John Glass, in a note to clients, slapped a ”still expensive” tag on the stock Wednesday, though he still has a “sector outperformer” rating on the stock.

“We continue to have valuation concerns,” Banc of America Securities analyst Andrew Barish wrote in a note to clients.

Barish added that he does not expect Starbucks to exceed earnings estimates this year as it has many times in the past due to higher labor costs and other expenses as well as slower same-store sales growth. The Banc of America Securities analyst has a “neutral” rating on the stock.

Since those reports were published last Wednesday, Starbucks’ stock price has fallen an additional 6.7 percent.

The stock closed Friday at $48.62 on Nasdaq.