Crunch puts the mochas on Starbucks profits

More tales of woe from coffee giant Starbucks, which saw its profits slump by 97% last quarter.

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Last Updated: 06 Nov 2012

Starbucks made a measly net profit of $5.4m in the three months to September 28, a 97% slide from last year’s equivalent figure of $158.5m. The cost of its ongoing restructuring efforts was the major reason for the precipitous drop, adding a $105m hit to the bottom line, although the coffee chain also saw an 8% fall in like-for-like sales. All the numbers were worse than analysts expected – and the subsequent 3% fall in its share price means it’s now lost 58% of its value in the last year. Investors will be steaming.

Starbucks’ revenues were up slightly, from $2.44bn to $2.52bn – but that was lower than the expected figure of $2.58bn (it also gives it a profit margin of 0.2% - even online retailers in the dotcom boom would have blanched at that). And if you strip out the impact of new outlets, sales were actually noticeably down on last year, so it's definitely seeing lower footfall. Clearly its days of reporting bumper growth figures are well and truly at an end – possibly for good. It said yesterday that it would open fewer international stores than previously planned, and also sell cheaper drinks – both of which will have an impact on revenues.

To be fair, CEO Howard Schultz – who was brought back to steady the ship earlier this year – is under no illusions about the extent of Starbucks’ problems. He’s already admitted that the chain has opened far too many outlets, and is now desperately trying to cut costs in order to boost margins. He’s in the process of closing over 600 in the US alone (plus another 60 in Australia), getting rid of more than 1,000 jobs in the process. But although this will save money in the long term, it costs money in the short term (about $105m, to be precise).

If you believe Schulz, his turnaround strategy is starting to have an impact. He said last month that he thought the company’s slump had bottomed out, after an improvement in store traffic during October, and yesterday he insisted that the ‘significant transition’ of the last year had left Starbucks well-placed for 2009. He talked about a ‘re-architected cost structure’, a ‘healthier store portfolio’, 'a renewed emphasis and investment around coffee leadership'  (whatever that means) and ‘a galvanized company with a common purpose’.

The trouble is, there wasn’t too much in yesterday’s results to back all this up. And as consumer spending continues to slow, it’s a bit hard to see how Starbucks is going to buck the general malaise in what is a very competitive market. Investors will hope Schulz isn’t looking at his baby through mocha-tinted spectacles...


In today's bulletin:

Now house sales hit 30-year low
Vodafone to cut £1bn costs as sales slow
Editor's blog: The City's Oedipus complex
Crunch puts the mochas on Starbucks profits
PR headache for Ryanair after bird trouble

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