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Jul 27, 2017

Starbucks signals stateside caution on lower profit; closing Teavana stores

DavidsTea turnaround strategy in focus as Starbucks announces plan to shutter Teavana stores

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Starbucks Corp's (SBUX.O) new chief executive said the world's biggest coffee chain is making a long-term investment in China, as worries that growth from its dominant U.S. market is cooling.

Kevin Johnson, who succeeded Starbucks co-founder Howard Schultz as CEO in April, is tasked with the difficult job of finding new ways to deliver the robust growth that Wall Street has demanded from the popular chain.

The urgency of Johnson's mandate was underscored on Thursday, when the Seattle-based company posted quarterly profit that just matched analysts' estimates. Starbucks also tempered expectations for the current quarter as it faces softness in the U.S. retail and restaurant industries and said it would close all 379 of its Teavana stores.

The company's shares fell four per cent to US$57.14 in after-hours trading.

The financial report, the first under Johnson's guidance, landed just hours after Starbucks said it would buy the remaining 50-per-cent stake of its East China business from its joint venture partners for about US$1.3 billion, in its biggest ever acquisition.

Net income fell 8.3 per cent to US$691.6 million, or 47 cents US per share, for the third quarter ended July 2. Excluding items, Starbucks earned 55 cents US per share, which matched analysts' average estimate as complied by Thomson Reuters I/B/E/S.



U.S. restaurants are locked in a bitter fight for market share, battling new competition from non-traditional rivals such as meal kit sellers and convenience stores.

Sales at its mainstay U.S. cafes open at least 13 months rose five per cent in the latest quarter. Traffic turned slightly positive, reversing three straight quarters of declines that the company attributed in part to changing its loyalty program to focus on dollars spent rather than the number of purchases they make.

Same-store sales from China, where there are 2,800 stores in 130 cities, were up a robust seven per cent.

The 16,302 cafes in Starbucks' U.S.-dominated Americas region contributed US$974.8 million in operating income in the quarter. In contrast, the 7,183 cafes from the China/Asia Pacific region posted US$223.8 million.

Johnson told Reuters that the cash deal in China, which will give it ownership of about 1,300 stores in Shanghai and Jiangsu and Zhejiang provinces, is part of the company's "long game" in the country that is its fastest-growing market outside the United States.

Meanwhile, the company signaled caution at home.

"The combination of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors has us a bit more cautious going into Q4," Starbucks Chief Financial Officer Scott Maw said in a statement.

Starbucks, which bought Teavana for US$620 million in 2012, said most stores will be closed by Spring 2018. It will continue selling Teavana branded products in its Starbucks stores.

 U.S. restaurants are locked in a bitter fight for market share, battling new competition from non-traditional rivals such as meal kit sellers and convenience stores.

Sales at its mainstay U.S. cafes open at least 13 months rose five per cent in the latest quarter. Traffic turned slightly positive, reversing three straight quarters of declines that the company attributed in part to changing its loyalty program to focus on dollars spent rather than the number of purchases they make.

Same-store sales from China, where there are 2,800 stores in 130 cities, were up a robust seven per cent.

The 16,302 cafes in Starbucks' U.S.-dominated Americas region contributed US$974.8 million in operating income in the quarter. In contrast, the 7,183 cafes from the China/Asia Pacific region posted US$223.8 million.

Johnson told Reuters that the cash deal in China, which will give it ownership of about 1,300 stores in Shanghai and Jiangsu and Zhejiang provinces, is part of the company's "long game" in the country that is its fastest-growing market outside the United States.

Meanwhile, the company signaled caution at home.

"The combination of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors has us a bit more cautious going into Q4," Starbucks Chief Financial Officer Scott Maw said in a statement.

Starbucks, which bought Teavana for US$620 million in 2012, said most stores will be closed by Spring 2018. It will continue selling Teavana branded products in its Starbucks stores.