Starbucks drops on weak earnings, outlook

Weakness in Europe hurts overall profit at the coffee giant.

By Jonathan Berr Jul 26, 2012 8:51PM

Image: Starbucks © Bloomberg, Getty Images

Shares of Starbucks (SBUX) plunged in after-hours trading Thursday after the coffee retailer reported worse-than-expected earnings and slashed its outlook, citing the economic turmoil in Europe, among other reasons.

Net income rose 19% to $333.1 million, or 43 cents a share, from $279.1 million, or 36 cents, a year earlier. Revenue surged 13% to $3.3 billion, fueled by a 6% gain in stores opened for at least a year. The results trailed Wall Street consensus forecasts of profit of 45 cents on revenue of $3.3 billion.

Shares fell more than 10% in after-hours trading to $47.07. Shares were up 30% this year at Thursday's closing price.

One reason for the poor performance was weakness in Europe. The company's biggest market is the U.K. where it has about 740 locations. Reports out of the U.K. said the country's economy contracted worse than economists expected. The country's outlook remains poor even though it is hosting the Olympics and recently celebrated the Diamond Jubilee of Queen Elizabeth.

Operating income in Starbucks' business that includes Europe fell 47% to $2.6 million as revenue rose 9% to $282 million. More worrisome were same-store sales in the region, which were little changed despite a high-profile advertising push.

The rest of Starbucks was fine. Revenue in the Americas rose 9% to $2.5 billion as operating income jumped 14% to $512.4 million. Operating income in China/Asia Pacific rose 37% to $61.4 million as revenue surged 31% to $181.8 million. Even so, the economic headwinds do not bode well for the company as consumers are thinking twice before ordering fancy coffee drinks.

Starbucks now expects revenue to grow 10% to 12% in the fiscal fourth quarter, below the 13.9% gain analysts had expected. It lowered its earnings guidance to 44 cents to 45 cents a share from an earlier forecast of as much as 47 cents. That lags analysts' expectations of 48 cents.

The company, though, is not retrenching. It plans 1,200 net new stores in the 2013 fiscal year, a 20% growth. The company expects to achieve revenue growth of 10% to 13%, which again trails analysts' projections of 13.9.%.

If there is one bright spot for Starbucks it's that coffee prices are moving lower. Sadly, that's another sign of the economic slowdown.

Jonathan Berr is a coffee drinker but not a Starbucks shareholder. Follow him on Twitter@jdberr.

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