Starbucks Shares Fall on Concern That Profit Growth Will Ebb

July 25 (Bloomberg) -- Bloomberg’s Yang Yang breaks down third-quarter results from Starbucks the coffee retailer topped profit and revenue estimates and Chief Executive Officer Howard Schultz sets the company’s sites on a lunch menu. She speaks on “In The Loop.”

Starbucks Corp. (SBUX), the world’s biggest coffee-shop chain, fell the most in more than three months on concern that ingredient prices and a push to open more stores will weigh on profit growth.

The company said yesterday that it’s 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 raised alarm bells for investors, said Peter Saleh, a New York-based analyst at Telsey Advisory Group. The stock fell 2.1 percent to $78.74 in New York, the biggest one-day drop since April 11. The decline cut Starbucks’ year-to-date gain to less than 1 percent.

“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 fare and tea, he said.

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Starbucks said earlier that it has already bought all of the coffee it needs for this fiscal year and about 40 percent for 2015. Close

Starbucks said earlier that it has already bought all of the coffee it needs for this... Read More

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Photographer: Jason Alden/Bloomberg

Starbucks said earlier that it has already bought all of the coffee it needs for this fiscal year and about 40 percent for 2015.

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 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.

Photographer: SeongJoon Cho/Bloomberg

Customers stand at a counter inside a Starbucks store in Gimpo, South Korea. Close

Customers stand at a counter inside a Starbucks store in Gimpo, South Korea.

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Photographer: SeongJoon Cho/Bloomberg

Customers stand at a counter inside a Starbucks store in Gimpo, South Korea.

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), meanwhile, recently stepped up marketing of its morning menu and gave away free McCafe coffees.

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.

Drought, Rains

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.

Photographer: Jason Alden/Bloomberg

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. Close

To cope with increases in the cost of ingredients, Starbucks raised its cafe prices... Read More

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Photographer: Jason Alden/Bloomberg

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.

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) also has said recently it’s recommending a price increase to its franchisees based on the soaring cost for coffee.

Starbucks Chief Executive Officer Howard Schultz said on CNBC today that the company knows how to manage coffee prices and that investor concern was overblown.

“We will navigate this,” he said.

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 Stephen West

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