August 2, 2007 / 7:45 PM / 10 years ago

Starbucks finds it's not immune to spending blips

LOS ANGELES (Reuters) - Is this the start of the latte recession?

<p>A sugar packet from a Starbucks coffee shop is pictured in London, March 15, 2007. For years, Starbucks has claimed its perpetually growing chain of stores was resistant to blips in the U.S. economy. But this week it tempered that message, implying its customers might actually be cutting back on that extra Frappuccino. REUTERS/Catherine Benson</p>

For years, Starbucks has claimed its perpetually growing chain of stores was resistant to blips in the U.S. economy. But this week it tempered that message, implying its customers might actually be cutting back on that extra Frappuccino.

The admission means Starbucks Corp (SBUX.O) may be joining other restaurant companies who have taken a hit as consumers trim spending in the face of higher gasoline and food prices.

Starbucks, after reporting a 9 percent rise in third-quarter earnings on Wednesday, said weakened consumer spending was one reason why customer traffic at its U.S. stores rose less than 1 percent during the period.

Executives also blamed heightened competition as rivals such as McDonald’s Corp (MCD.N) and Dunkin’ Donuts have upgraded their coffee offerings.

In an interview on Wednesday afternoon, Chief Executive Jim Donald said higher prices on commodities such as gasoline and milk were affecting Starbucks customers.

“All these things just add up to, maybe people aren’t going four times a week,” he said. “Maybe it’s three times a week.”

In a note to clients, Banc of America Securities analyst Andrew Barish said it was the first time Starbucks has said the weak economic environment and tougher competition was affecting sales. Barish has a “neutral” rating on Starbucks shares, which have dropped 23 percent this year on investor fears of slowing U.S. growth and rising costs on commodities such as milk.

Donald’s comments stand in stark contrast to those Starbucks executives have made in recent years about the company’s ability to withstand an economic slowdown.

“I would never say never, but I don’t see anything that indicates in the near future that Starbucks is going to be susceptible to the economy,” Chairman Howard Schultz said in an interview with Reuters last September.

William Blair analyst Sharon Zackfia said on Thursday that economic worries were to blame for a string of small monthly same-store sales increases Starbucks posted in 2001 around the time of the September 11 attacks. Same-store sales is a key retail measure that tracks sales at stores open at least 13 months.

Since then, however, Starbucks has grown to more than 10,000 U.S. stores from about 3,000, making it even more vulnerable to the vagaries of consumer spending, Zackfia said.

“Anyone who has 10,000 stores is going to have a fairly wide bandwidth of customers they serve,” she said. “They are certainly not immune.”

Zackfia, who has an “outperform” rating on Starbucks shares and owns the stock, pointed out, however, that the coffee shop chain has not been as hard hit as others in the industry.

The Seattle-based company stood by its full-year earnings outlook, though it said achieving the upper end of its range of 87 to 89 cents per share would be “challenging.”

In contrast, companies including Panera Bread Co PNRA.O, P.F. Chang’s China Bistro Inc PFCB.O and Wendy’s International Inc WEN.N have warned in the last month of weaker-than-expected results for the rest of the year, in part because of weak customer traffic.

Other restaurant companies have been more resilient. McDonald’s and Chipotle Mexican Grill Inc (CMG.N), for instance, in the last month both posted quarterly same-store sales gains that exceeded Wall Street expectations.

Starbucks shares were down 16 cents at $27.04 in afternoon trade on Nasdaq on Thursday.

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below