Starbucks memo stirs unwarranted fears: analysts

By Alexandria Sage

LOS ANGELES (Reuters) - A memo from Starbucks Corp.'s (SBUX.O) founder and chairman warning of threats to the brand has created misplaced growth fears, analysts said on Tuesday, arguing that the memo was a rallying cry for managers rather than a call to slow down.

Shares of the coffeehouse chain have fallen 8 percent since February 23, when an internal memo by Chairman Howard Schultz became public. He said that the iconic brand had strayed from its roots.

Fears that the company would curtail growth to avoid the "watering-down" of the Starbucks experience added to existing concerns over profit margins.

But such caution is unwarranted, according to analysts and a fund manager, who said the Seattle-based company's earnings and sales growth and expansion plans are still sound.

"(The memo) was a call on the company's culture without financial implications of slower store growth, higher capital spending, or increased operating expenses," J.P. Morgan analyst John Ivankoe wrote in a report published on Tuesday.

Ivankoe argued that Starbucks' stock decline was a buying opportunity and said Schultz's letter was focused on increasing Starbucks' appeal to consumers.

Dan Geiman, an analyst at McAdams Wright Ragen, agreed the memo did not predict any major strategy shifts or changes in Starbucks' growth going forward.

"I think (the memo) is why the stock is down, but I don't think it will have much impact on the company and their growth and what they're doing financially," Geiman said.

Geiman said Starbucks was performing "extremely well," adding that any suggestions in the media that the company is broken were off base.

In the memo dated February 14, Schultz warned that automatic espresso machines, bagged coffee and store designs that don't vary from New York to China have led to sterility and invited competition from fast-food companies and others.

The memo, sent to Chief Executive Jim Donald and other senior management, urged the company to "realize it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition and the passion that we all have for the true Starbucks experience."

MONTHLY SALES SLOWING, BUT WITHIN VIEW

Starbucks has said it plans to open 2,400 stores this year. In the last ten years, the company has grown to more than 13,100 stores from some 1,100.

Don Gher, chief investment officer of Coldstream Capital Management in Bellevue, Washington, said the Schultz memo hit at the same time as accusations by Ethiopia that Starbucks was blocking an attempt to trademark its coffee beans and a story in Consumer Reports magazine that coffee from McDonald's Corp. (MCD.N) beat Starbucks in a taste test.

Those news reports also coincided with a period of turmoil in the markets overall and as Starbucks' monthly sales increases at established restaurants downshifted to a 3 percent to 7 percent range, one the company has forecast for a long time but always beat, said Gher, who owns Starbucks shares.