Starbucks quarterly results disappoint but coffee chain expects boost from China deal

PUBLISHED : Friday, 03 November, 2017, 7:46am
UPDATED : Friday, 03 November, 2017, 7:46am

Starbucks cut its profit forecast and posted disappointing quarterly results on Thursday, amid a bitter battle with competitors ranging from boutique coffee seller Intelligentsia to lower-price rivals like McDonald’s.

Investors, long used to Starbucks exceeding investor expectations, sent shares down 7.3 per cent to US$50.85 in after-hours trade.

The Seattle-based coffee chain said it now sees long-term earnings per share growth of 12 per cent or greater, versus its prior call for growth of 15 per cent to 20 per cent.

The company, which like many other chains is streamlining menus, said results should get a bump from its pending US$1.3 billion purchase of the remaining 50 per cent of its East China business from joint venture partners. That deal will give Starbucks ownership in 1,300 cafes in the area that includes Shanghai.

Same-store sales from China were up 8 per cent, but the broader China and Asia Pacific region posted a rise of 2 per cent, versus expectations of 3.2 per cent.

Starbucks buying out Chinese venture for US$1.3 bn

Fourth-quarter revenue missed Wall Street’s target after sales at established global cafes gained 2 per cent, less than analysts’ average target of 3.2 per cent, according to Consensus Metrix.

Hurricanes Harvey and Irma battered same-store sales at more than 1,100 US cafes. Sales at mainstay US cafes were down 2 per cent for the quarter that ended October 1, excluding the hurricane impacts, they would have been up 3 per cent – still just short of analysts’ estimate.

Analysts have warned that the Seattle-based company is being “middled” by rising competition on the value and quality fronts and that it must bolster sales of higher-priced specialty drinks and breakfast sandwiches.

Chief Executive Kevin Johnson said in an interview that there was no evidence Starbucks was being hit by competition. “We are not going to be squeezed in the middle,” he said.

Johnson noted that US restaurants in general are seeing declining traffic and said that the one area where the company has seen softness is in the afternoons, particularly with regard to sales of its blended drinks such as frappuccinos.

Still, US convenience stores and fast-food chains are improving quality and pricing aggressively.

McDonald’s recently expanded its McCafe menu with new macchiatos and lattes and is selling small McCafe espresso drinks for US$2. Elsewhere, Dunkin’ Brands Group is offering special deals on breakfast sandwiches in its bid to win breakfast.

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At the same time, upscale craft coffee rivals like Nestle SA’s Blue Bottle and Intelligentsia are opening more shops. The number of competing coffee shops within one mile of Starbucks shops in several large US markets has increased in recent years, BMO Capital Markets analyst Andrew Strelzik said in a note before the earnings.

Adding to the pressure, Strelzik said, Starbucks continues to build its own US stores at the risk of cannibalising sales.

The company, which is cutting expenses and brands, announced a deal to sell its Tazo tea brand to Unilever Plc for US$384 million.

Johnson, who succeeded Starbucks co-founder Howard Schultz as chief executive in April, is under pressure to continue serving up the kind of growth that Wall Street has come to expect from the world’s biggest coffee chain.

In the last 12 months, Starbucks shares are up about 4 per cent, while the S&P 500 index is up more 20 per cent.

Starbucks’ total net revenue decreased 0.2 per cent to US$5.70 billion, compared with analysts’ revenue target of US$5.80 billion, according to Thomson Reuters I/B/E/S.

Net income attributable to the company fell to US$788.5 million, or 54 cents per share, in the latest quarter, from US$801 million, or 54 cents per share, a year earlier.

Excluding items, it earned 55 cents per share, in line with Wall Street targets.

Starbucks forecast earnings of US$2.30 to US$2.33 per share for 2018, when competitive and labour pressures are likely to pose continued challenges.

Starbucks has been adding working hours at some US stores to ease backups caused by a flood of mobile orders. Meanwhile, cities and states are boosting the minimum wage and a tightening labour market is forcing some chains to increase pay and benefits to recruit and retain workers.