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Starbucks Shares Sink After Bakery Deal

Starbucks' stock declined on Tuesday as its acquisition of a small bakery chain puts it further into the highly competitive food market and may take some time to reap benefits.

Starbucks Center
Mark Ralston | Getty Images
Starbucks Center

Late Monday, Starbucks announced that it is buying La Boulange, based near San Francisco, in a $100 million cash deal. The coffee shop chain said it will start replacing its current lineup of baked goods with offerings from La Boulange early next year, starting with French pastries such as the croissant. Products will start appearing in Bay Area stores first then roll out nationally.

Seattle-based Starbucks also says it plans to make the bakery into a national presence in the years ahead.

Mark Kalinowski of Janney Capital Markets said in a client note that Starbucks gets about $1.5 billion in revenue from food sales at its U.S. company-run stores and wants to increase that revenue. But the analyst points out that two-thirds of Starbucks' customers don't usually order food during their visits.

Kalinowski said that the transaction will likely lower Starbucks' earnings by about 2 cents per share during the second half of fiscal 2012.

Given that, he lowered his third-quarter earnings forecast by 1 cent to 47 cents per share and reduced his fourth-quarter estimate by 1 cent to 50 cents per share. The analyst also cut his full-year guidance by 2 cents to $1.87 per share.

Kalinowski reaffirmed a "buy" rating for Starbucks and kept the company as his top pick for the year within the group of restaurants he covers.

William Blair's Sharon Zackfia said that Starbucks is evolving into a portfolio of brands — which already includes Tazo Tea and Hear Music — but that its La Boulange buyout is a long-term project.

"While Starbucks will pursue the opportunity to expand La Boulange locations over time beginning with key cities in the United States, that opportunity is clearly a longer-term one and will take time to affect Starbucks' financials given the small size of the business versus Starbucks' nearly $12 billion in revenue last year," the analyst wrote.

Zackfia maintained an "outperform" rating on Starbucks.

Shares of Starbucks dropped $1.32, or 2.5 percent, to $52.58 before the market open. Starbucks shares are down from a 52-week high of $62 set in mid-April. They were up 60 percent as of Monday's close from their August 2011 low of $33.72 per share.