Starbucks puts spotlight on China as U.S. growth cools

Reuters
FILE PHOTO - People form a line to enter the original Starbucks coffee shop at Pike Place Market in Seattle, Washington, U.S. on February 11, 2017. REUTERS/Chris Helgren/File Photo

By Lisa Baertlein

LOS ANGELES (Reuters) - Starbucks Corp's (SBUX.O) new chief executive said the world's biggest coffee chain is making a long-term investment in China, amid 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 grapples with softness in the U.S. retail and restaurant industries and said it would close all 379 of its Teavana stores.

Shares of the company, which is often punished by investors when it does not exceed Wall Street's expectations, tumbled 5.5 percent to $56.24 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 percent stake of its East China business from its joint venture partners for about $1.3 billion, in its biggest ever acquisition.

Net income fell 8.3 percent to $691.6 million, or 47 cents per share, for the third quarter ended July 2. Excluding items, Starbucks earned 55 cents 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 5 percent 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.

Still, executives cut Starbucks' full-year net earnings per share target to a range of $1.96 to $1.97 from a previously lowered forecast of $2.06 to $2.10, following a deceleration in U.S. same-store sales that has continued into July.

"We think it's a prudent thing to do," Johnson told Reuters.

Same-store sales from China, where there are 2,800 stores in 130 cities, were up a robust 7 percent in the latest quarter.

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

"Starbucks' opportunity for growth in China is unparalleled ... and we are just getting started," Johnson said.

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

(Reporting by Lisa Baertlein in Los Angeles; Editing by Bernard Orr)