News Column

Starbucks Loses a Bit of Steam

July 27, 2012

Melissa Allison

starbucks, earnings, results, coffee

Starbucks has been on such a roll that Wall Street forgot the company can stumble.

That's what happened Thursday, when the coffee-shop chain announced essentially good news in its fiscal third-quarter earnings: profit up 19 percent, sales at longtime stores going strong. It's just that Starbucks missed profit expectations by 2 cents.

Two pennies.

Some stocks would rise on that news, but it came as a shock to the world's largest latte slinger's shareholders, who sent Starbucks stock down more than 10 percent in after-hours trading Thursday.

"It's very rare that they miss, so when they do, you take note," said Jason Moser, senior stock analyst at The Motley Fool research house in Alexandria, Va.

The last time Starbucks failed to meet Wall Street's expectations was in the last three months of 2008, when the recession was bearing down.

The chain had struggled for more than a year at that point, and its woes -- along with those of other consumer brands -- were considered by some to be a proxy for broader consumer behavior and economic health.

"The consumer leads the economy," said Sharon Zackfia, an analyst at William Blair & Co. who follows consumer brands including Starbucks. "By December 2007, I was convinced we were in a recession, and people in other sectors were not necessarily worried."

Even Safeway CEO Steven Burd has waxed coffee-centric in gauging the economic winds. "It's early, but we're seeing a trend back to lattes," he told investors in late 2009, as the recession tapered off.

This time it's different.

Rather than all consumer brands hitting a wall, they are posting mixed results.

Zackfia noted slowdowns at Starbucks, McDonald's, Chipotle Mexican Grill and "a slew of apparel companies, although it's hard to tell what's the weather and what isn't with apparel companies."

Others, including Whole Foods Market, Panera Bread and Nordstrom, remain strong.

"Everybody's more nervous, but it's a pretty modest slowdown so far," she said. "We could have a little bit of a tough slog, but maybe more like a 2001 tough slog, not the bath we took in '07-08."

In addition to results being more mixed now than in past downturns, it's not as if Starbucks fell off a cliff in the third quarter, which ended July 1.

Its profit rose 19 percent from a year ago, to $333.1 million, or 43 cents a share. Analysts had expected 45 cents.

Revenue for the quarter grew 13 percent to $3.3 billion, driven by a 31 percent boost to $181.8 million in its fast-growing Asia region.

That area's sales remain small compared with Starbucks' businesses in the Americas and in Europe, the Middle East and Africa. But it's catching up. Starbucks plans to make China its largest foreign market -- outpacing current front-runners Canada and Japan -- by 2015. It also will open its first stores in India this year and Vietnam next year.

In reporting third-quarter results Thursday, Starbucks also outlined growth plans for the fiscal year, which starts in October.

The company expects revenue growth of 10 to 13 percent and earnings per share of $2.04 to $2.14 in fiscal 2013. At the low end, that's about 15 percent higher than the $1.77 to $1.78 that Starbucks projects for the current fiscal year.

The chain is on track to add 1,000 new stores this year, and said Thursday it will increase new openings to 1,200 -- mostly in the U.S. and China -- in fiscal 2013.

"Keeping it all in perspective, it was still a good quarter, and the longer-term picture is very encouraging," The Motley Fools' Moser said.

But investors hammered the stock in extended trading Thursday. After climbing $1.99, or 4 percent, to $52.41 in regular trading, shares plummeted on the earnings news, dropping $5.33, or 10 percent, to $47.07 a share.

The surprise came in Starbucks' U.S. business, where executives said traffic slowed beginning in mid-June. The decline continued into July, leading the chain to lower its fourth-quarter forecast to 44 to 45 cents a share, which is 3 to 4 cents below what Wall Street analysts had projected.

"This is not a Starbucks issue. This is a macro problem," CEO Howard Schultz told analysts during a conference call Thursday.

Still, he said, the quarter "fell short of our expectations and is unacceptable to me personally."

Starbucks has navigated the slow economy successfully for years, Schultz said, and it will deliver on the new earnings projections even with a slowdown.

The chain has pinned its future to a range of initiatives, including growth in Asia, continued efficiencies in the United States and new products such as its Refreshers energy drinks.

It also has a turnaround plan for its struggling European market. Operating income for Europe, the Middle East and Africa -- made up mostly of European stores -- dropped 47 percent to $2.6 million in the third quarter.

Following a blueprint that resembles its 2008 turnaround in the United States, Starbucks is evaluating everything about its business in Europe and plans to close some unprofitable stores there.

"Michelle Gass, who is now the president [of that region], was literally at my side during the [U.S.] transformation agenda and co-authored that strategy with me, so she's there and she understands the game plan as well as anyone in the company," Schultz said.



Source: (c)2012 The Seattle Times Distributed by MCT Information Services


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