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Starbucks cuts outlook as world economy struggles

Starbucks cuts outlook as world economy struggles

July 26th, 2012 by CANDICE CHOI, AP Food Industry Writer in News

NEW YORK (AP) - Starbucks managed to sell pricey lattes and wrangle its way out of the Great Recession stronger than ever. Now the coffee chain is again being pressured by a slowing global economy.

The Seattle-based coffee seller said Thursday that net income in its fiscal third quarter rose 19 percent from a year ago. But Wall Street analysts expected more, and were further disappointed when the company cut its outlook for the current quarter because of a recent slowdown in U.S. customer traffic and persisting challenges in hard-hit European regions.

Shares slumped 10 percent in after-hours trading.

Starbucks said global revenue at cafes open at least a year rose 6 percent in its most recent quarter. The increase in the metric - important because it strips out the effect of recently opened and closed stores - was driven by a 12 percent increase in China and Asia and a 7 percent increase in the Americas.

In June and July, however, the company noted that traffic had slowed amid persistently high unemployment and shaky consumer sentiment.

"Traffic trends are noticeably down in many parts of the U.S.," said Troy Alstead, the company's chief financial officer, of the quarter that ended July 1. That trend continued into July.

In the European market, where Starbucks is struggling to turn around its business, the sales figure was flat.

"Europe has been a challenge for us all year and continues to be," Alstead said. He noted that the flat sales were an improvement from the previous quarter, however, when the figure slipped 1 percent.

To perk up its business in the region, Starbucks has been instituting measures similar to those it took during the downturn in the U.S. a few years ago, such as introducing loyalty programs and improving service.

It's also considering closing unprofitable stores in Europe, which could result in charges of up to $20 million in the current quarter. The company noted that closures in the U.S. during the recession helped strengthen the company.

"We have great confidence that we are going to be able to turn Europe around," said CEO Howard Schultz. Still, the company says its store expansions next year will be focused in the United States and the fast-growing market in China.

But a slowing global economy isn't the only concern for the company. As Starbucks faces increasing competition from fast-food chains offering specialty coffees, it is moving to expand beyond its ubiquitous cafes. This year, it has plans to expand its push into the fast growing premium juice and single-cup coffee markets.

For the three months ended July 1, the company said it earned $333.1 million, or 43 cents per share. That's compared with $279.1 million, or 36 cents per share, a year ago.

Total revenue rose 13 percent to $3.3 billion.

Analysts on average expected a profit of 45 cents per share on revenue of $3.34 billion. The higher revenue was the result of increased customer traffic and customers spending more per visit, Starbucks said.

For the current quarter, Starbucks cut its profit outlook to 44 cents to 45 cents per share from a range of 46 cents to 47 cents per share. Analysts were predicting 48 cents per share.

Shares dropped $5.34 to $47.07 in after-hours trading. During the trading day, shares had gained $1.99, or 4 percent, close at $52.40.