A stellar earnings report from Starbucks ( SBUX) was unable to quell growing concerns about the java giant's high valuation going forward. The fast-growing coffee shop chain reported record sales and earnings for the first quarter of its fiscal 2005 after the closing bell Wednesday, and raised its earnings outlook for the full year. Despite the upbeat news, its shares were recently falling $2.59, or 4.7%, to $52.75 in Thursday trading. Thursday's slide is a continuation of a January selloff that had knocked 11.3% off of Starbucks shares through Wednesday's close -- consistent with the broader market's trend in early 2005 of making last year's winners this year's losers. Some analysts point to Starbucks' gains in December -- it rose about 11% alone that month -- as evidence that portfolio managers were scooping up the stock at the end of the year for "window dressing" purposes, allowing them to disclose ownership of the stock in their literature sent to clients. Therefore, it would follow that these same managers would unload the stock in January to shore up their positions.
Lid on Growth?
Wall Street's negative reaction to such a glowing earnings report, however, underscores real concerns about the company's ability to maintain its growth rate. "With top line growth coming in at the lowest level in six quarters, and the toughest same-store sales comps in roughly a decade coming up in the next three months, we think this growth stock's growth has peaked," H.D. Brous & Co. analyst Barry Sine said in a research note. (Sine discloses no position in Starbucks, but his firm does make a market in the company's stock.) "Starbucks reported a marked slowing in revenue growth suggesting that the previous fad-like popularity of the company's brand is now fading," Sine said. Domestic retail sales growth slowed to 24.3% from 32.2% in the fourth quarter and 25.7% in the year-ago period. Domestic licensing revenue growth was cut in half at 19%, compared to the year before. Food service sales rose just 7.2%, down from the previous year's 21.3%, and its domestic operating margin was flat at 19.9%.