Starbucks Corp, the world’s largest coffee chain, expects rising coffee prices to hit profits more than it previously thought but stressed that it would not raise prices to cover the extra expense.
That news sent its shares down almost 3 percent, even as the company reported profits and US sales that handily topped Wall Street’s targets.
Rising prices for ingredients ranging from coffee and milk to beef and bread are squeezing restaurant operators.
Photo: Bloomberg
Earlier this week Starbucks rival McDonald’s Corp said it would hike prices “where it makes sense” to offset some, but not all, of the food cost increases.
Seattle-based Starbucks on Wednesday narrowed its earnings forecast to US$1.44 to US$1.47 a share for this fiscal year, compared with the average analyst expectation of US$1.49 a share.
The company expects commodity costs to cut earnings by about US$0.20 this fiscal year, compared with its previous forecast of US$0.08 to US$0.10 a share in November.
“I think they’re being conservative,” Oppenheimer analyst Matt DiFrisco said, because of the unknowns facing the company.
While a strengthening US economy could boost sales and give the company room to put through another price increase, he said, Starbucks does not yet know how much it will have to pay to oust Kraft Foods Inc as its supermarket packaged coffee distributor.
“They’re going to have to pay Kraft some money this year,” RBC Capital Markets analyst Larry Miller said.
Starbucks wants to end its 12-year-old partnership with Kraft on March 1, and some analysts estimate that the fee for early termination could top US$1 billion.
Starbucks removed one uncertainty from investors’ minds by locking in coffee prices for this year. Coffee represents 15 percent to 20 percent of its cost of sales.
The benchmark “C” arabica coffee futures contract trading on ICE Futures US remains around levels last seen 13-and-a-half years ago, after surging nearly 80 percent in a rally that began in June last year.
Late last year the company raised drink prices in the US and China due to surging prices for coffee and other commodities.
Starbucks’ profit for the fiscal first quarter ending on Jan. 2 jumped almost 44 percent from the year-ago period to US$346.6 million, or US$0.45 a share. That easily topped analysts’ average call for a profit of US$0.39 per share for the latest quarter, according to Thomson Reuters I/B/E/S.
Cost control and efficiency efforts helped operating margins improve 800 basis points to 17.3 percent in the US and increase 620 basis points to 13.8 percent internationally.
Sales at Starbucks cafes open at least 13 months were up a better-than-expected 8 percent in the US and up 5 percent internationally for the holiday quarter, which traditionally is Starbucks’ biggest for revenue.
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