Starbucks' Schultz Thinks World Is Basically Falling Apart, Seeks Investor Support
Starbucks (SBUX) - Get Report founder and CEO Howard Schultz came well prepared with a laundry list of excuses for his company's mixed quarter.
Most of them revolved around the general sense of chaos reverberating around the world. "I think what we are experiencing to date is something different," responded Schultz when asked by an analyst on a call Thursday for some context on how today's global environment is comparable to other periods when Starbucks saw softer than expected sales. The often upbeat Schultz then pulled no punches on the macroeconomic and societal challenges Starbucks and other companies are up against right now.
"I think we have a situation where you have a very uncertain election [in the U.S.], you have domestic civil unrest with regard to race, and I think the issues around terror have created a level of anxiety -- so we are no longer looking at just an economic downturn, there are a number of things that we are facing as citizens and I think the direction of the country," Schultz said.
He added, "we will do everything we can to not only meet the guidance, as we've done in the past, try and overachieve it, but no one should misinterpret or in any way look at the challenges that we and many, many other companies are facing as something that has been done before. This is quite unusual, it's unsettling, it's unnerving, and as a result of that, it requires an approach that is quite different than anything we've done before."
The source for Schultz' brutal honesty was scattered everywhere.
Starbucks reported that same-store sales for the fiscal third quarter ended June 26 rose 4%, snapping a 25-quarter stretch of 5% growth or greater. Results also marked a steep slowdown from 7% same-store sales growth delivered in the preceding quarter. Schultz called the slowdown in the U.S. an "anomaly" and did his best to remind investors Starbucks has seen pockets of sales softness tied to prevalent economic conditions in the past only to bounce-back when the environment turned for the better.
But the disappointment for Starbucks didn't stop with the U.S.
Net sales rose 7% from the prior year to $5.2 billion, falling shy of Wall Street estimates for $5.34 billion. Earnings, adjusted for one-time items, gained 17% year over year to 49 cents a share. The result was in line with analyst forecasts. By region, same-store sales in Starbucks Americas delivered a 4% same-store sales increase, below estimates for a 5.6% improvement.
Europe notched a 1% same-store sales drop likely due to reduced tourism in key markets such as France in the wake of several high-profile terrorism incidents. Wall Street saw sales for Starbucks Europe rising 2.4%. Even China, where Starbucks continues to aggressively open new stores and expand its offerings, came up short relative to Wall Street expectations. Same-store sales in China increased 3%, shy of forecasts for a 4.4% gain.
A confluence of negative world events knocked down Starbucks a bit in the second quarter.
"In our view, Starbucks' ability to command a premium valuation hinges on its ability to deliver sustainable same-store sales growth of at least 5% long term," pointed out Jim Cramer and Jack Mohr, co-portfolio managers of the Action Alerts PLUS Charitable Trust Portfolio, in a new note, continuing, "Until then, we believe upside will be capped."
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Starbucks narrowed its full-year sales forecast to growth of 10% from over 10% previously. The company reiterated its full-year earnings forecast of $1.88 to $1.89 a share, excluding one-time items.
Shares of Starbucks fell as much as 4% in after-hours trading on Thursday but are now down 3% at around $56.