Starbucks cuts profit outlook as competitors close in

(This story corrects third paragraph to show that U.S. same-store sales up not down.)

FILE PHOTO: A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California, U.S. on October 27, 2015. REUTERS/Lucy Nicholson/File Photo

(Reuters) - Starbucks Corp SBUX.O trimmed its profit forecast and posted disappointing quarterly sales on Thursday, squeezed by competitors ranging from boutique coffee sellers like Intelligentsia and lower-price rivals including McDonald's.

Investors used to Starbucks beating expectations and raising profit outlooks sent shares down 3.4 percent in extended trading.

Hurricanes Harvey and Irma battered same-store sales at more than 1,100 cafes in the United States, which still accounts for the lion’s share of operating income. Sales at U.S. cafes were up 2 percent for the quarter that ended Oct. 1. Excluding the hurricane impacts, they would have been up 3 percent - still just short of analysts’ estimate.

During a conference call, executives also pegged the same-store sales weakness to slower service as workers juggled mobile ordering, complex menus and other issues as well as soft restaurant foot traffic.

The Seattle-based coffee chain cut its long-term earnings target to growth of 12 percent or greater per share from its prior call for growth of 15 percent to 20 percent.

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

Starbucks, which is cutting costs, streamlining menus and selling or shuttering some businesses, also announced a deal to sell its Tazo tea brand to Unilever Plc ULVR.L for $384 million.


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.

CEO 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.

But on a conference call with analysts, Chief Financial Officer Scott Maw said, “With competitive pressures on the rise, we remain laser-focused on driving profitable share growth as we head into calendar 2018.”

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

McDonald's Corp MCD.N recently expanded its McCafe menu with new macchiatos and lattes and is selling small McCafe espresso drinks for $2. Elsewhere, Dunkin' Brands Group Inc DNKN.O 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 NESN.S Blue Bottle and Intelligentsia are opening more shops.


In the last 12 months, Starbucks shares are up about 4 percent, while the S&P 500 index is up more 20 percent. Its stock has been trading at a price-to-earnings ratio of 27.8, slightly above McDonald's but about half that of Chipotle Mexican Grill Inc CMG.N, 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 1.6 percent to $788.5 million. Excluding items, it earned 55 cents per share, in line with Wall Street targets.

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.

The company said results should get a bump from its pending $1.3 billion purchase of the remaining 50 percent 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 percent in the latest quarter, 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