The company lowers forecast, cites waning consumer confidence
Starbucks reported a 19-percent increase in third-quarter profit late Thursday, but warned that the “fragile” economic picture began to slow traffic growth in U.S. locations, starting in June.
In a call to analysts following the company’s earnings report, Howard Schultz, the Starbucks chair, chief executive and president, said the results were less than expected for the 17,651-unit global chain. The company lowered expectations for the fourth quarter, saying earnings per share will total between 44 cents and 45 cents. Earlier, the company had projected earnings per share of between 46 cents and 48 cents for the fourth quarter.
Seattle-based Starbucks joins a growing number of Wall Street favorites in recent weeks that blamed macroeconomic challenges for surprisingly disappointing results, including McDonald’s Corp. and Chipotle Mexican Grill Inc. Troy Alstead, Starbucks’ chief financial officer, said that the lowered forecast represents “the difficult economic environment all global retailers are confronting today.”
The results, combined with Starbucks' lowered forecast and comments about economic and consumer challenges, led to a stock decline Friday morning, similar to Chipotle Mexican Grill's stock plunge after it reported earnings last week. Starbucks' stock fell more than 10 percent in trading on the New York Stock Exchange, and was still down 8 percent in the afternoon, coming in at $48.07 at 3 p.m.
For the quarter ended July 1, Starbucks said net income totaled $333.1 million, or 43 cents per share, compared with $279.1 million, or 36 cents per share, in the same quarter a year ago. Total revenue rose 13 percent to $3.3 billion, and same-store sales rose 6 percent worldwide, with U.S. stores posting a 7-percent same-store sales increase.
For the Americas, which includes 12,653 locations in the U.S., Canada and Latin America, the 7-percent increase reflected a 5-percent increase in transactions and a 2-percent increase in average check. Revenue for the region grew 9 percent to $2.5 billion.
“Despite coming in short of our expectations, I am pleased with the increasing operating leverage we are seeing, the fact that this was our 11th consecutive quarter of record results and the fact that we achieved the results in the face of high legacy commodity costs and challenging economic and consumer headwinds in key markets,” Schultz said.
Battling poor consumer confidence
Alstead said U.S. stores experienced a “change in the consumer feel,” with same-store sales in mid-June slipping slightly from the upper end of mid-single-digit growth or above, as was typical earlier in the quarter. The slowdown continued into July and was across all geographies and dayparts, he noted.
With revenues up 45 percent for the quarter with Channel Development — what used to be called consumer packaged goods, or CPG — and booming results in the China Asia Pacific region, Starbucks is still expecting to continue its trajectory of growth. “We’re still expecting to grow traffic and improve margins,” said Alstead. “But the growth trajectory is just slightly lower.”
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Schultz pointed to innovations that will drive continued revenue growth:
• Starbucks recently introduced new Refreshers energy drinks in coffeehouse locations as an instant VIA product and as a ready-to-drink brand in grocery and other retail stores.
• The company has continued to grow distribution points for the Evolution Fresh juice brand in bottles and is planning to add two more juice bar locations for a total of four before the end of the year.
• The acquisition earlier this year of the La Boulange bakery chain in San Francisco will help the coffeehouse chain improve food offerings.
• Sales of packaged coffee and single-cup packs have continued to grow. Starbucks said it will be selling its new Verismo single-serve espresso machines in stores in time for the holidays.
Starbucks is also ramping up new openings planned for next year in the U.S. and China.
Trouble in Europe, growth in Asia
The situation for Starbucks is much worse in Europe, however. The region that includes Europe, the Middle East and Africa, or EMEA, had flat same-store sales, though revenue rose 9 percent to $282 million.
Turnaround efforts in economically challenged Europe will likely require a portfolio review and store closures — as was necessary in the U.S. during the economic downturn here, the company said. And lingering headwinds will force Starbucks to “redouble efforts to examine all aspects of the business,” said Schultz.
Schultz said a review of the portfolio in Europe would speed a turnaround, as it did in the U.S. after the company closed almost 1,000 locations. “Now the U.S. portfolio is stronger than it has been in decades,” he said.
Starbucks ended the quarter with 1,836 locations in the EMEA.
“We have great confidence that we can turn Europe around,” Schultz added. “But it’s not going to be a sprint. It will be a long slog.”
The China Asia Pacific region, on the other hand, where the company operates or licenses 3,162 units, was pushing ahead like a “freight train,” Alstead said.
Revenue for the region grew 31 percent during the quarter to $181.8 million and same-store sales rose 12 percent, reflecting an 8-percent increase in transactions and a 4-percent increase in average check.
Alstead said the company is on track to reach its goal of 1,500 in mainland China by 2015. The company opened 42 locations there in the third quarter.
Starbucks opened 231 new stores globally during the quarter, including its 600th store in mainland China and first locations in Finland and Costa Rica.
Next year the company is planning to open 1,200 locations — about 200 more than in fiscal 2012 — with about half of those in the Americas region, and the majority in the U.S. The company also expects to open 500 locations in the China Asia Pacific region with about half of those in China.