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Starbucks Falls Most in 17 Months After Stock Rating Is Lowered

Patrons sit inside a Starbucks in New York, Nov. 16, 2007. Photographer: Robert Caplin/Bloomberg News - Bloomberg

By Duane D. Stanford
Bloomberg

January 02, 2007

Starbucks Corp., whose shares last year had the biggest annual decline ever, fell the most in 17 months in New York trading after Bear Stearns & Co. lowered its recommendation on the stock.

The firm cut its rating on Starbucks shares to ``peer perform'' from ``outperform'' on concern that a decline in sales and higher food costs will hurt profitability at the world's largest chain of coffee shops.

Seattle-based Starbucks has expanded its customer base to include ``less affluent'' coffee drinkers ``who react to economic pressures,'' Joseph Buckley, a Bear Stearns analyst in New York, wrote in a note to investors today. ``Dairy costs also remain stubbornly high and are likely to continue to significantly pressure margins in the March and possibly June quarters.''

The downgrade was the fifth for Starbucks by analysts tracked by Bloomberg since Nov. 15, when the coffee chain lowered its profit and sales forecasts following a first-ever drop in U.S. customer visits. Starbucks stock in 2007 fell 42 percent, the worst annual performance since the shares were first sold to the public in June 1992 at $17 each, adjusted for splits.

The rating cut by Bear Stearns was the firm's first change in its view of Starbucks since it raised its recommendation to outperform in April 2005. The stock then rose to a high of $39.63 on May 5, 2006 before falling to recent levels.

Starbucks dropped $1.16, or 5.7 percent, to $19.31 at 4 p.m. New York time in Nasdaq Stock Market composite trading.

`Great Brand'

Starbucks has tried to increase sales with television commercials and new products including ``skinny'' lattes with skim milk and sugar-free syrup, Buckley said. Starbucks is a ``great brand'' with ``much growth ahead'' outside North America, he said.

``But it does appear that the business is maturing and investors are adjusting their perception of the shares accordingly,'' Buckley said.

RBC Capital Markets, Goldman Sachs Group Inc., CIBC World Markets and Robert W. Baird & Co. also have downgraded Starbucks since November. Of the 22 analysts tracked by Bloomberg that follow the company, 12 have buy ratings, nine say hold, and one rates the stock a sell.

To contact the reporter on this story: Duane D. Stanford in Atlanta at dstanford2@bloomberg.net .

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