Did Starbucks Sell Its Soul For Growth?

“Over the past 10 years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

– Starbucks Founder Howard Schultz, in an e-mail to CEO Jim Donald, February 14, 2007

“The … underlying fear is that Starbucks is finally seeing the signs of saturation in the US.”

– John Glass (subscription required), analyst, CIBC World Markets

It’s been a tough year for Starbucks (SBUX).  After years of phenomenal growth and an unstoppable stock (SBUX 15 Year Chart), Starbucks growth has started to slow, especially in the last two quarters, and its shares are off 37% over the last 12 months (SBUX 2 Year Chart).

Same store sales and number of customer transactions in the US stores have been notably weak the last two quarters (WSJ Graphic).  Earnings growth has slowed into the mid teens.

All fast growing retailers ultimately reach saturation at which point their growth slows and their stocks’ selloff dramatically to reflect to the reduced growth outlook.

One wonders if Starbucks has reached that point.

At 29 times trailing 12 months earnings (EV/Net Income), Starbucks shareholders appear to be hoping it hasn’t.

Investors will be paying close attention when they report FY 4th quarter and full year earnings after the close today.