Bloomberg News

Starbucks Shares Fall Amid Concern That Profit Growth Will Ebb

July 24, 2014

Starbucks

Starbucks said earlier that it has already bought all of the coffee it needs for this fiscal year and about 40 percent for 2015. Photographer: Jason Alden/Bloomberg

Starbucks Corp. (SBUX:US), the world’s biggest coffee-shop chain, fell as much as 3.4 percent in late trading on concern that its plans to open more stores and escalating ingredient prices will weigh on profit growth.

The company is investing in new locations and technology, as well as spending money on the Fizzio soda line and a packaged-goods business. It also faces climbing coffee prices and worker costs, including a new tuition-reimbursement program. While Starbucks expects long-term earnings growth of 15 percent to 20 percent, the numbers may come in at the low end of that range next year, Chief Financial Officer Scott Maw said on a conference call.

The guidance may have raised alarm bells for investors, said Peter Saleh, a New York-based analyst at Telsey Advisory Group. Following Maw’s remarks, the stock fell as low as $77.75 in after hours, reversing an earlier gain. Starbucks had advanced 2.6 percent to $80.45 this year through the close of trading.

“When they said it’s going to be toward the lower end, that was disappointing,” said Nick Setyan, an analyst at Wedbush Securities in Los Angeles who has the equivalent of a buy rating on Starbucks. Still, the growth may ultimately be higher than people expect because of new items such as lunch and tea, he said.

Third Quarter

The muted outlook follows fiscal third-quarter results that beat profit and revenue estimates, helped by increased sales of food at Starbucks’ U.S. cafes. Net income (SBUX:US) climbed 23 percent to $512.6 million, or 67 cents a share, from $417.8 million, or 55 cents, a year earlier, the Seattle-based company said in a statement. Analysts had predicted 66 cents on average, according to data compiled by Bloomberg.

Revenue jumped 11 percent to $4.15 billion in the period, which ended June 29, also surpassing estimates.

Starbucks has been testing new lunch sandwiches at its U.S. locations to attract more customers after the morning rush. It’s also recently started selling Greek-yogurt smoothies and Fizzio sodas in some cafes and added bakery items and breakfast sandwiches. The food expansion contributed to a 6 percent gain in same-store sales for the Americas region. Analysts had estimated a 5.1 percent increase, according to Consensus Metrix.

“Food is very, very strong” in the U.S., Chief Operating Officer Troy Alstead said in a phone interview. “We have undertaken in the last 18 months a whole transformation of our food program.”

The company forecast fiscal 2014 profit of as much as $2.67 a share, excluding some items. Revenue will grow at least 10 percent in fiscal 2015, Starbucks said.

Lunch Fare

In May, Starbucks began selling grilled cheese, beef brisket baguettes and grilled-chicken sandwiches in 178 of its cafes. The chain plans to introduce new lunch fare nationwide in fiscal 2015, which starts near the end of September.

The coffee chain revamped its U.S. breakfast lineup earlier this year to better compete in an increasingly crowded morning-food market. Taco Bell in March began selling breakfast fare, including waffle tacos. McDonald’s Corp. (MCD:US), meanwhile, recently stepped up marketing of its morning menu and gave away free McCafe coffees.

Coffee prices also are threatening to crimp profit. To cope with increases in the cost of ingredients, Starbucks raised its cafe prices less than 1 percent and bagged coffee in grocery stores by 8 percent on average. A drought in Brazil had pushed up the price for coffee. Now heavy rains in the South American country, the world’s top coffee producer and exporter, may reduce 2015’s crop yield.

Starbucks said earlier that it has already bought all of the coffee it needs for this fiscal year and about 40 percent for 2015. After the earnings were released, Alstead said that the amount has now reached 50 percent. Dunkin’ Brands Group Inc. (DNKN:US) also has said recently it’s recommending a price increase to its franchisees based on the soaring cost for coffee.

Starbucks has been expanding abroad and this month opened its first cafe in Colombia, a three-story store made with local materials. Its Asian unit is also opening more locations in Vietnam, Japan and China.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Ben Livesey


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Companies Mentioned

  • SBUX
    (Starbucks Corp)
    • $75.34 USD
    • 0.25
    • 0.33%
  • MCD
    (McDonald's Corp)
    • $93.53 USD
    • -0.22
    • -0.24%
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