Starbucks Investors Hope Meeting Will Calm Jitters

By Nichola Groom
Reuters
Mon Mar 19, 2007 10:04 PM BST

LOS ANGELES (Reuters) - Starbucks Corp. (SBUX.O: Quote, Profile , Research) management, facing a battered share price and concerns about dilution of its brand, is expected to reassure investors at its annual meeting this week that its aggressive growth plans are still on track.

Since hitting an all-time high in November, Starbucks shares have lost more than 20 percent as investors fret over profit margins that have lagged expectations and, most recently, a high-profile memo in which Chairman Howard Schultz warned of the "commoditization" of its iconic brand.

Investors are eager for the company to address those concerns at Wednesday's meeting in Seattle.

"Will management boost investor confidence with hints of current trends, announce more aggressive share repurchase intentions, discuss compelling innovation or offer other meaningful commentary?" UBS analyst David Palmer wrote to clients on Monday.

Starbucks annual meetings are typically little more than company pep rallies, with performances by musicians such as Tony Bennett and clips of Starbucks references on late-night talk shows receiving more attention than business trends.

Analysts including Palmer and Goldman Sachs' Steven Kron, however, expect this year to be different as it will be the first time Schultz will address investors since warning senior management in a leaked memo last month that measures taken to fuel rapid expansion had led to a "watering down" of its brand.

The memo has contributed to a more than 5 percent drop in Starbucks shares since it was made public on Feb. 23. Investors and analysts expect shareholders to react positively to efforts to reassure them of its commitment to a strategy of adding 2,400 stores this year to its more than 13,000 worldwide.

"A reiteration of targets and strategy could reinvigorate investors," Kron said in a note to clients last week, in which he said Starbucks' recent stock weakness created "a compelling buying opportunity."

Other analysts agree that the stock, which is trading at 28 times analysts' average 2008 earnings estimate, is prime for buying. The shares have historically traded at around 35 times forward earnings or higher.

The Schultz memo has not been the only worry for Starbucks shareholders in recent months. Higher labor and other costs have led to weaker-than-expected profit margins, and investors are eager for signs of improvement.

"The concern that at least investors have been feeling of late has really been the weaker-than-expected margins," said Mike Koskuba, an analyst and portfolio manager with Victory Capital Management, which owns about 1 million Starbucks shares. "If (Schultz) was to address the margin issue, that would be a positive."

Starbucks also recently received a slew of negative publicity over a trademark dispute with the Ethiopian government and a magazine report saying McDonald's Corp.'s (MCD.N: Quote, Profile , Research) coffee beat Starbucks' in a taste test.

Koskuba said he expects a very upbeat annual meeting, though Starbucks investors are not the only ones eager to have their concerns heard by management on Wednesday.

A protest of labor union supporters and Ethiopian coffee farmer supporters is planned at the meeting.