Starbucks profit up, but Europe is a challenge

Reuters Middle East
The Starbucks logo is seen outside the new Starbucks cafe in Warsaw
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The Starbucks logo is seen outside the new Starbucks cafe in Warsaw

(Reuters) - Starbucks Corp reported better-than-expected quarterly profit but global sales at established coffee shops fell short of analysts' estimates due to weakness in Europe, sending its shares down five percent in after-hours trade on Thursday.

Sales from cafes open at least 13 months fell 1 percent in the Europe, the Middle East and Africa (EMEA) region during the latest quarter. Analysts polled by Consensus Metrix had expected a 2.2 percent rise in EMEA same-store sales.

Executives attributed the drop to weakness in Europe, which suffered its first decline in same-store sales since 2009.

Sales fell in Ireland and Germany during the fiscal second quarter and were up just slightly in France and the United Kingdom, Starbucks Chief Financial Officer Troy Alstead said.

Europe has been a weak spot for the world's biggest coffee chain. The region is grappling with debt woes and austerity measures and, earlier this week, Britain said its economy had fallen into its second recession since the financial crisis.

"The situation is very, very tough," Chief Executive Howard Schultz said of Europe's economy.

"We will turn the Europe business around in the same way we turned the U.S. business around," Schultz told analysts on a conference call.

Starbucks has tasked Michelle Gass, a veteran Starbucks executive who was a leader in the U.S. turnaround, with reviving the Europe business.

While the Americas region accounts for most of Starbucks' revenue and operating profit, EMEA contributes roughly 10 percent of company revenue and in the latest quarter posted an operating loss of $5.5 million.

Starbucks shares were down 4.9 percent at $57.67 in extended trading.

While investors focused on Europe, results from the United States -- which brews up most of the company's business -- remained on track.

"The U.S. consumer has been very strong for us," Alstead told Reuters.

Net income at the world's biggest coffee chain was up almost 19 percent to $309.9 million, or 40 cents per share, for the second quarter ended April 1 -- a penny better than analysts' average estimate, according to Thomson Reuters I/B/E/S.

Total revenue rose 15 percent to $3.2 billion.

Same-store sales were up 8 percent in the Americas and 18 percent in the China/Asia Pacific region -- roughly in line with analysts' estimates.

On the heels of its second-quarter profit beat, Starbucks raised its 2012 forecast for earnings of $1.81 to $1.84 per share, up from $1.78 to $1.82 per share, previously.

That forecast calls for third-quarter earnings of 45 cents to 46 cents per share.

Analysts, on average, expect a third-quarter profit of 46 cents per share, excluding items, and full-year profit of $1.86, according to Thomson Reuters I/B/E/S.

Although it raised its forecast, Starbucks -- which has locked in prices for its coffee for this year and most of next year -- said it does not expect to benefit from lower commodity costs until next year.

"It's not the earnings tailwind that a lot of us thought. That's not going to be well-received given where estimates are," RBC Capital Markets analyst Larry Miller said.

Starbucks returned to profit growth in 2010 after a two-year restructuring that involved slashing costs and closing nearly 1,000 cafes around the world.

Investors of Starbucks have seen shares of the company soar since the restructuring, rising from just under $10 in February 2009 to a close above $60 on Thursday.

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

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