Japanese traders welcome Starbucks

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Starbucks Coffee Japan Ltd is set for a solid debut in one of the
most keenly awaited listings in Tokyo this year.

Starbucks Coffee Japan Ltd is set for a solid debut in one of the most keenly awaited listings in Tokyo this year, as individual investors gulp down the espresso maker's stylish image and potential for growth. The Japanese unit of U.S. coffee giant Starbucks Corp has set a price of 64,000 yen ($534) per share for Wednesday's listing on the Nasdaq Japan bourse, which will make it the first unit of the Seattle-based firm to go public. The sticker-tag came in at the high end of the tentative price range of 57,000 to 67,000 yen. Starbucks Coffee Japan will issue 220,000 new shares, with an additional 60,000 existing shares offered to the public ahead of the debut. "The (one share minimum) trading unit and subsequent low entry price make it a fairly simple sell to retail investors. Its business model is easy to understand and its growth prospects look good,"​ said Hideki Kamiya, senior fund manager at Asahi Tokyo Investment Trust Management. "I'm not buying, but it should get off to a firm start,"​ added Kamiya, whose firm oversees 347.94 billion yen of investment trusts. Starbucks Japan has earmarked the 14 billion yen in funds generated from the offering to help fuel its planned expansion to 500 stores by March 2004, improve existing outlets, reduce debt and provide liquidity for a stock option programme. With 1.42 million shares outstanding, the company would boast a market capitalisation of 90.8 billion yen at the initial public offering (IPO) price. That would be about one-fifth the size of fellow restaurant operator McDonald's Co (Japan) Ltd, which staged a sizzling debut on the Jasdaq market in July. But McDonald's stock soon fell and is now trading about 24 percent below its IPO price of 4,300, hit by the broader market's woes and concerns over its high valuation. Some analysts say Starbucks Japan may meet the same fate. LIKE THE COFFEE, IT AIN'T CHEAP "I'm a big fan of their Frappucino, but the stock is just too expensive,"​ said Hideo Ueki, executive director at UBS Asset Management, which manages 10.87 billion yen of investment trusts. "If you are a bull, and you believe next year's earnings will double, then P/E will halve, bringing it in line with Doutor Coffee Co Ltd, McDonald's and other comparable firms. But I'm not sold on their ability to grow profits on that scale."​ Starbucks Japan gave no earnings estimates for the current business year to March 2002. Based on fiscal year 2000, it would trade at a price-to-earnings ratio (P/E) of just over 60 at the IPO price. By comparison, Doutor, Japan's largest coffee chain with over 1,000 stores dotting the nation, is currently trading at around 30 times earnings. McDonald's, up 0.62 percent at 3,260 yen by the midday break, has a P/E ratio of 29. One of the major worries in the market surrounds slowing growth in same-store sales at Starbucks Japan. After falling from 20 percent in fiscal 1999 to 13 percent in fiscal 2000, Societe Generale predicts that figure to flatten out in the current business year to around one percent year-on-year. "This company may be able to grow by piling on store after store, but if profits aren't expanding at existing stores, their bottom line will eventually soften,"​ said Junichi Kanamori, analyst at Societe Generale. "By some accounts, their business model has reached a limit. The market will soon turn attention to what new businesses they will enter to drive new growth."​ Tully's Coffee Japan Co Ltd, Starbucks' smaller rival and an affiliate of Seattle-based Tully's Coffee Corp, is trading at about 104 times earnings forecasts for the current year. Societe Generale's Kanamori says the market may not be willing to extend Starbucks anything near the same multiple, considering he expects Tully's earnings-per-share to increase at an annual rate of over 50 percent for the near future - a number few expect Starbucks to match. At present, Tully's has 36 stores mainly in the Tokyo metropolitan area. Starbucks Coffee Japan, a 50-50 joint venture between Starbucks Coffee International, a wholly owned subsidiary of U.S. Starbucks, and Japanese retailer and restaurateur Sazaby Inc, operates 291. Some analysts say Doutor may prove a more appropriate comparison. Offering a lower-priced cup of coffee, market participants expect Doutor's EPS to rise at a clip of 15 to 20 percent over the next three years. ($1=119.75 Yen).

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