Starbucks Sorts Investor Complaints Today

Here is a balanced, well researched report from the Seattle PI. Please visit the paper by clicking here.

Coming up is a report on my express visit to Starbucks headquarters today; I had the pleasure of meeting with two Starbucks senior Vice Presidents and six other experts and Directors - all within one hour.
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By CRAIG HARRIS
P-I REPORTER
March 20, 2007

Like other investors in Starbucks Corp., Elizabeth Moon hasn't been thrilled with the company's traditionally high-flying stock taking a considerable slide this year.

Yet the retired Seattle insurance adjuster views the 11 percent drop since the end of 2006 as a blip in the road and says she's looking forward to today's annual meeting in McCaw Hall.

"The stock has gone up the past couple three days, and that is good, because we had a down trend for a while," said Moon, whose investment in the past six years has increased more than 200 percent. "But I think it's a well-run company and one of the things that impresses me is that it treats its employees well."

Not everyone holds that sentiment.

When the about 5,000 shareholders gather in Seattle Center this morning, they likely will be greeted by a small -- but vocal -- opposition of baristas and advocates who say they are upset with the company's dealing with organized labor and how much it pays Ethiopian coffee farmers. The group, which held a news conference Tuesday, said it plans to have giant inflatable props and picket signs.

"We are demanding a living wage, guaranteed hours and benefits," said Tomer Malchi, a New York Starbucks barista who was at the news conference and part of the fledgling IWW Starbucks Workers Union. Starbucks said that none of its U.S. stores is represented by organized labor and that employees receive raises of up to 12 percent in the first year.

Meanwhile, the theme for Chairman Howard Schultz and other Starbucks executives will be where the company has come in the past year and the future of the international coffee giant, a spokesman said.

Analysts said Schultz also is expected to discuss his now infamous leaked e-mail that lamented the challenges at Starbucks and what he called a "watering down" of the company.

The meeting also could include a surprise musical guest tied to the company's record label, Hear Music.

"You never know who will show up. It will be a memorable show," said Valerie O'Neil, a company spokeswoman.

Last year, Tony Bennett serenaded investors, and the year before, Herbie Hancock played the piano. Both artists ultimately had their CDs sold in Starbucks stores. The New York Post, citing unidentified sources, reported earlier this month that Starbucks was close to introducing a deal with former Beatle Paul McCartney. Starbucks would not confirm or deny the report.

James Maher, an analyst with San Francisco-based ThinkEquity Partners, expects Schultz to use the meeting to calm investors by confirming growth projections that were announced in October.

At the time, Schultz said Starbucks could grow to 40,000 stores. The company currently has 13,168 stores in 39 countries.

A month after that announcement, the company's stock hit a 52-week high of $40.01 Nov. 16. Since then the price has dropped 22 percent, and it closed Tuesday at $31.38 on the Nasdaq Stock Market. The S&P 500 Index and a Bloomberg Index of 115 leading retail stocks have been essentially flat since that time, with gains of 2 percent or less.

David Trainer, founder of New Constructs, a Nashville, Tenn.-based independent equity research firm, isn't surprised by Starbucks' precipitous fall.

Trainer told Fortune Magazine in early November that investors were overestimating Starbucks' profitability because they were overlooking off-balance-sheet debt. On Jan. 12, he issued a report, based on information from the company's annual report, that estimated that Starbucks had $3.4 billion in future operating leases that were off the balance sheet.

"Our stance hasn't changed. It's still a dangerous stock. We see it as bad risk reward," Trainer said in a phone interview Tuesday.

Trainer said that because of increased competition from McDonald's and other fast-food operations and the saturation of Starbucks stores, margins will decline and the stock could drop an additional 15 percent.

Starbucks did not return calls Tuesday regarding its off-balance-sheet debt.

On Tuesday, Malchi and three other activists called on Starbucks to raise employees' wages, provide better health care and pay Ethiopian farmers more.

Wondwossen Mezlekia, an advocate for Ethiopian farmers, said he wants Starbucks to enter into a licensing agreement with the African country.

Starbucks said it has a history of paying premium prices for coffee around the world, and last year it increased its payment 11 percent, to $1.42 a pound. The company does not break down how much it pays farmers in Ethiopia, but just 2 percent of the 294 million pounds of coffee Starbucks bought in the past fiscal year came from the African country, Starbucks said.

O'Neil said Starbucks does not disclose its average pay, but baristas in the first year can earn up to a 12 percent pay raise and are eligible for another raise in six months. She also said that the company has 127,000 U.S. employees and that 84,000 are eligible for benefits. Of those, 52,000 are enrolled in the company's health coverage. She said 83 percent of all employees have health coverage through Starbucks or another employer, such as a spouse's.

O'Neil also said there is little union representation at Starbucks; just eight of the 7,500 company-operated stores worldwide have unions. All are in Canada.
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P-I reporter Craig Harris can be reached at 206-448-8138 or craigharris@seattlepi.com.