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Starbucks finds itself wallowing in the dregs

Its stock has fallen 40 percent in the past year.

SEATTLE - With its affluent customer base and uncanny knack for drawing crowds, Starbucks Corp. has long seemed immune to the slowdowns that plague most retailers when the economy falters.

But the king of the $4 coffee is feeling the pinch now. Dairy prices have skyrocketed, fast-food chains have made it easier to find a good cup of joe, and traffic in U.S. stores has flattened amid high fuel prices and turmoil in the housing and credit markets.

Add it all up, and it has dragged the company's stock down nearly 40 percent in the past year.

The company reports earnings Thursday for its fourth fiscal quarter, which ended in early October. Analysts polled by Thomson Financial are projecting Starbucks will earn 21 cents a share on $2.43-billion in revenue.

While many analysts remain bullish on the company's long-term growth prospects, they're keeping a close eye on same-store sales - a key measure of a retailer's health - and some are wondering if certain U.S. markets have gotten saturated.

"At some point, the growth sort of levels out," said Robert Toomey, an analyst with E.K. Riley Investments.

Some aren't convinced that market saturation is a problem for a company that has remained steadily profitable while opening an average of six stores a day.

"It's always been a part of Starbucks' operating model ... to open stores near one another," said Sharon Zackfia, an analyst with William Blair & Co. "Initially, they often do cannibalize the nearest store when they do open, and then after a while the store that was cannibalized bounces back."

In an infamous leaked memo earlier this year, chairman Howard Schultz lamented that the company's aggressive growth had led to "a watering down of the Starbucks experience." Yet it shows no signs of slowing down.

In August, it stuck by guidance that it would open at least 2,400 new stores worldwide in the current fiscal year - twice as many as in 2003 - and slightly more next year. It has more than 14,000 stores today, 10 times more than a decade ago. Most are in the United States, but the company envisions serving half its coffee overseas, where executives and analysts see huge potential for growth, particularly in China.

"I think Starbucks will probably emerge from 2007 as a stronger operator than it's ever been before," Zackfia said. "But the question is, when does that materialize in the numbers?"

For the past two quarters, sales at stores open at least 13 months came in toward the low end of the company's guidance of 3 to 7 percent.

Starbucks estimates its average first-time customer makes $80,000 a year, enough to keep them lining up for mochas even when things like high gas prices might force others to cut back on indulgences.

But amid an ongoing housing slump and plunging consumer confidence, Starbucks regulars may be making do with one fewer trip.

Or are they defecting to cheaper competitors? McDonald's scored big this spring, when Consumer Reports ranked its premium coffee No. 1, beating Starbucks, Dunkin' Donuts and Burger King on taste and value.

[Last modified November 14, 2007, 01:00:02]