Starbucks' Bitter Taste

Updated from 1:55 p.m. EDT

Investors are tasting hints of a slowdown in Starbucks' (SBUX Quote) latest brew.

They looked past the java giant's solid third-quarter earnings on Thursday and instead focused on its July sales results, which contained the whiff of deceleration that may threaten the stock's rich valuation.

While Wall Street may be notorious for attributing undue significance to a single monthly sales number, the 4% comp rise posted by Starbucks for July marked its slowest month since December of 2001. It was at the low end of its target of 3% to 7% growth and continued a streak of slowing same-store sales growth to three months in a row.

For its part, Starbucks says the sales misstep was merely the result of being too popular and having long lines in its stores. But with the stock market being whipsawed back and forth as investors fret about the potential for a major slowdown in consumer spending, Starbucks' July results played into the market's fears.

Matthew DiFrisco, an analyst with Thomas Weisel Partners, said in a research note that Starbucks' sales partly reflect a "broader consumer slowdown." He downgraded the stock to peer perform from outperform based on the results.

Shares of Starbucks closed down $2.66, or 8%, to $30.64, having plunged as much as 14% to $28.72 earlier in the day.

For the quarter ended July 2, Starbucks earned $145 million, or 18 cents a share. That marked a 16% increase from the $125.5 million, or 16 cents a share, the company recorded a year earlier. Excluding a penny a share that was related to a one-time tax benefit, it met Wall Street's average forecast for earnings of 17 cents a share, according to Thomson First Call.

The coffee retailer's total revenue rose 23% to $1.96 billion as it continued to open stores at a vigorous clip. Quarterly same-store sales rose 6% for company-operated stores.

To view Street Insight's video review of Starbucks, please click here.

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