Starbucks suffers worst rout in two years, targets China

Bloomberg

Starbucks Corp. suffered its biggest stock decline in almost two years after cutting its forecast, renewing fears about sputtering growth at the world’s largest coffee chain.
The shares dropped as much as 8.2 percent to $54.63 in New York, the biggest intraday plunge since August 2015.
Slowing growth in the US forced Starbucks to cut its profit forecast for the fiscal year. The company also admitted defeat in its effort to run a chain of tea shops, saying it will shutter its Teavana stores, a move that will eliminate 3,300 jobs.
The tepid outlook adds the pressure on Chief Executive Officer Kevin Johnson to accelerate growth in China, which the company is increasingly targeting as a key market. On Thursday, Starbucks announced plans to buy out its East China joint venture for $1.3 billion, the biggest deal in the company’s history. This will allow it to take full control of 1,300 cafes in the world’s most populous country, where it sees a nascent coffee culture becoming a huge market.
With Starbucks reaching a saturation point in many places, China looms larger than ever as key to the chain’s prosperity.
“The growth opportunity
in China is unparalleled,” Kevin Johnson, the company’s chief executive officer, said in
an interview.
Same-store sales increased 4 percent last quarter in the third quarter, which ended July 2. That missed the 4.8 percent estimate of analysts.
Excluding some items, earnings amounted to 55 cents. That matched the analysts’ estimates. Revenue climbed to $5.66 billion, short of the $5.76 billion projection.
Starbucks sees profit for the full year at $2.05 to $2.06 a share, down from previous guidance range of $2.09 to $2.12.
The stock had gained 7.2 percent this year through Thursday’s close.
Tea remains more popular than coffee in China, but Starbucks is making inroads. Same-store sales — a key benchmark — rose 7 percent in the country last quarter.
Starbucks currently operates about 2,800 locations in China, with plans to hit 5,000 by 2021. And the business there will eventually be bigger that its operation in the US, Johnson said.
Mobile-App Snags
Starbucks’ same-store sales have risen for seven straight years, but slowing growth has put Johnson under pressure. The former technology executive, who took over from longtime CEO Howard Schultz in April, also has been contending with other headaches.
The company’s popular mobile app has created traffic jams at its cafes, with customers bunching up in pickup areas. Johnson said on Thursday that Starbucks has added “digital order managers” to 1,000 stores and has improved its ability to quickly serve customers who order and pay through their phones.

Food Growth
The sales gain in the US was 5 percent, which Johnson said was fueled in part by customers ordering more food. The coffee purveyor has been making a push to sell more edibles for years, with meals and snacks now accounting for about 21 percent of US sales. But the effort has been marked by stumbles, including menu misfires and complaints that food was too pricey or the portions were too small. The growth in food sales in primarily coming at lunch, Johnson said.
As Starbucks focuses on improving its digital app and selling more food, the company is stepping back from its tea business. The company said it will shutter all 379 of its Teavana retail stores, with the majority closing by next spring.
Starbucks bought the Teavana brand in 2012 for about $620 million, betting that it could find growth with the tea chain’s locations in malls.
But as Americans feverishly embrace e-commerce, and visit fewer shopping centres, the business has struggled. Starbucks now sells Teavana-branded products in its cafes, a business that generates about $1.6 billion a year in sales, according to Johnson.
“We have not been immune to the macro trend of declining mall traffic,” Johnson said. “It was time for us to acknowledge that.”