Starbucks executives told analysts Wednesday that rising coffee costs would take a greater-than-expected toll on earnings in 2011, but continuing sales momentum would likely offset the damage.
Officials from Seattle-based Starbucks Corp. offered updates on commodity costs, its packaged goods business and development targets after reporting a 44-percent increase in net income for the first quarter. The company also posted record U.S. sales and its fifth consecutive quarter of traffic growth. Click here for full results.
In projecting 2011 earnings between $1.44 and $1.47 per share, Starbucks said it now expects to absorb about 20 cents per share in higher commodity costs. The company had earlier projected the impact on 2011 earnings would be 8 cents to 10 cents per share.
Coffee prices on average are 40 percent to 50 percent higher than last year, the company said, noting that cocoa and sugar costs also are up. During the first quarter, the negative impact from higher commodity costs was about 3 cents, Starbucks said.
To minimize risk, Starbucks said it has locked in coffee costs for the year and may adjust menu prices.
Rather than raise prices across the board, however, Starbucks chairman and chief executive Howard Schultz said the company would continue the “price architecture” that it has been using over the past year, raising prices on certain products in select markets, while lowering prices on others.
Past coffee cost spikes have never lasted long, said Troy Alstead, Starbucks chief financial officer, noting “these headwinds we face in 2011 may well become tail winds in the future.”
More highlights from Starbucks earnings conference call:
Dispute with Kraft. Starbucks officials said they were confident the company would break its packaged coffee business away from Kraft Foods as planned on March 1, despite an ongoing legal dispute and arbitration proceedings. Kraft is disputing Starbucks’ separation and is seeking an injunction to stop the chain from taking its packaged coffee business away.
The company said the infrastructure is in place to shift the packaged coffee business in house this year. The move will likely bring some added costs during this “transitional year,” Schultz said, estimating an impact of about 2 cents per share, mostly in the second quarter. However, the company would also start seeing the benefits of resulting revenue growth.
Schultz said Starbucks had successfully transitioned its Tazo tea business from Kraft as of Jan. 1.
Overall, Starbucks’ consumer products group, or CPG, saw revenues increase 12 percent in the first quarter to $195.2 million, largely as a result of increased sales of packaged coffee and the company’s instant coffee, Via.
“We are confident that the full benefit of the investment we are making in CPG will become self evident once we begin to fully leverage this new capability and capture the full revenue and profit potential” from the integration of the packaged coffee and tea business, Schultz said.
Happy holidays. December brought what Schultz described as “the most successful holiday season in our 40-year history.”
Starbucks said revenue from U.S. locations reached a record $2.1 billion in the first quarter, driven by an 8-percent increase in same-store sales.
The company cited menu innovation and cost-effective marketing programs, including the use of social media, for the sales increase. Schultz noted that about 250,000 customers, for example, signed up to receive a daily text message during a 12-day holiday promotion period.
Starbucks’ loyalty program also continued to grow during the quarter, with about 42 cards sold per second during peak periods, Schultz said. During the quarter, customers loaded more than $700 million on their cards, 39 percent more than the year ago quarter.
Instant success. Sales of Starbucks’ Via Ready Brew continued to grow during the first quarter, boosted by the launch of new flavored versions of the instant coffee. The product’s volume increased 16 percent compared with the fourth quarter 2010, and points of distribution grew by 10 percent to more than 32,000 in November.
Sales of Via were so brisk during the holiday season that U.S. stores sold out of the Christmas Via two weeks before Christmas day, Schultz said.
In February, Starbucks will kick off a new Via advertising campaign with television, print and digital initiatives, as well as in-store sampling, to build awareness of the product.
Schultz said the growth opportunities for Via sales growth is huge, especially in international markets, where instant coffee is generally better accepted by consumers than it is North America.
Via will be launched in China in April, which follows the product’s “runaway success” in Canada, the United Kingdom, Japan and the Philippines, Starbucks officials said.
“We continue to view Via not as a singular product, but as a platform for which we are creating an innovative exciting portfolio of a number of products,” Schultz said.
The instant coffee market is estimated to be a $24 billion category, Schultz said. “It’s ripe for innovation and we believe strongly we’ve got the formula and we’ve cracked the code.”
Global growth. International stores performed well across all markets, particularly in the Asia Pacific region and Western Europe, said John Culver, president of Starbucks Coffee International
Culver said Starbucks stores in China showed same-store sales increases in the mid-20-percent range, and the brand is now in 33 cities on the mainland.
On Thursday, Starbucks Coffee France SAS said it expected to open its 58th store with a new unit in the Carrousel du Louvre, the retail center that adjoins the Paris museum.
Earlier this year, Starbucks signed a memorandum of understanding with Tata Coffee Limited in India, which will aid with coffee sourcing and roasting to expand stores there.
Culver said Starbucks has plenty of room for growth overseas.
“Currently only one in one hundred cups of coffee served around the world is Starbucks, and we remain convinced that we have a tremendous runway to profitably expand our footprint in our 53 existing markets and to thoughtfully enter new markets,” he said.
Seattle’s Best. Schultz said its secondary brand, Seattle’s Best Coffee, is testing a new coffee bar format in Walmart Supercenters in Canada. The brand also entered the ready-to-drink beverage category this week with a new line of canned iced lattes.
Schultz also said consumers are responding well to Seattle’s Best Coffee’s new “level” system, allowing customers to choose the level of boldness they want with help from a number rating on the package.
Contact Lisa Jennings at [email protected].