November 2, 2017 / 8:48 PM / a year ago

CORRECTED-UPDATE 2-Starbucks sales disappoint and shares drop 6 percent

(Corrects year-ago profit to $801 million from $801 billion)

By Lisa Baertlein and Uday Sampath Kumar

Nov 2 (Reuters) - IStarbucks Corp reported disappointing quarterly results on Thursday, after hurricanes cooled sales and amid a bitter battle with competitors ranging from boutique coffee seller Intelligentsia to lower-price rivals like McDonald’s.

Total revenue missed Wall Street targets and sales at established global cafes were up 2 percent, missing analysts’ average target of 3.2 percent, according to Consensus Metrix. The Americas, Europe and Asia all posted rises in sales at established stores that fell short of expectations.

Investors, long used to Starbucks beating Wall Street targets, sent shares down 6.3 percent to $51.40 in after-hours trade.

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 told Reuters 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 U.S. 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 beverages such as frappuccinos.

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

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

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 U.S. 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 U.S. stores at the risk of cannibalizing sales.

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 percent, while the S&P 500 index is up more 20 percent.

Starbucks’ stock has been trading at a price-to-earnings ratio of 27.8, slightly above McDonald’s and Dunkin’ Brands, but well below the 52.74 ratio for Chipotle Mexican Grill Inc , according to Thomson Reuters data.

Total net revenue decreased 0.2 percent to $5.70 billion, compared with analysts’ revenue target of $5.80 billion, according to Thomson Reuters I/B/E/S.

Net income attributable to the company fell to $788.5 million, or 54 cents per share, in the latest quarter, from $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 in the third quarter of 2016 changed the basis of its loyalty program to dollars spent from number of orders because customers were buying items individually to get more points. Traffic statistics fell when customers resumed ordering items together.

Labor pressure is also heating up.

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

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

Reporting by Lisa Baertlein in Los Angeles and Uday Sampath in Bengaluru; Additional reporting by Peter Henderson in San Francisco; Editing by Savio D'Souza and Lisa Shumaker

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