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Starbucks (SBUX) to Lay Off Employees Under Restructuring Plan

Zacks Equity Research

Per media report, Starbucks Corporation SBUX is planning organizational reshuffling and lay offs.  Notably, the company is likely to lay off non-retail employees at the vice president and senior vice president level.

In a memo last week, Kevin Johnson, the chief executive officer of Starbucks said that “Starting next week and into mid-November there will be leadership shifts and non-retail partner impacts as we evolve the direction of teams across the organization in size, scope and goals.”

Johnson also emphasized on increasing the pace of innovations, which is meaningful to the company’s business, partners and customers. With growth prospects and fat returns, Starbucks has been streamlining its business and directing investments toward operations.

These efforts are aimed at reviving the company’s sales in the United States, which has been declining over the past several quarters. In fiscal 2017, the company’s Americas segment (accounting for 70% of the total revenues) posted 3% comps growth, down from 6% in the year-ago period. Also, in the first nine months of fiscal 2018, this division posted 2% comps growth, down from 4% in the year-ago period.

Backed by this latest restructuring initiative, the company intends to expand its margins as well. In fact, decline in margins has been a major concern for the company over the past few quarters. In the first, second and third quarter of fiscal 2018, Starbucks non-GAAP operating margin shriveled 170 basis points (bps), 80 bps and 230 bps, respectively. The margin contraction in third-quarter fiscal 2018 can be primarily attributed to a 130 bps impact from investments associated with the U.S. tax law change, product mix shift largely toward food and planned partner. Rise in cost due to investment in digitalization also dented the company’s operating margin.

Price Performance

In the past three months, shares of this Zacks Rank #3 (Hold) company have gained 12.5% compared with the industry’s 3.1% growth. The company’s operating fundamentals such as solid global footprint, successful innovations, best-in-class loyalty program, digital offerings and product innovations will continue to boost growth in the long run.

Meanwhile, Starbucks is strengthening its product portfolio with significant innovations related to beverages, refreshment, health and wellness, tea and core food offerings. Evidently, beverage innovations have been significantly contributing toward Starbucks’ comps growth over the years. This apart, the company’s efforts to offer more nutritional and healthy products to its customers are commendable.

Key Picks

Some better-ranked stocks in the industry are Chanticleer Holdings, Inc. BURG, Ruth's Hospitality Group, Inc. RUTH and Dine Brands Global, Inc. DIN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chanticleer Holdings has an expected earnings growth rate of 12.9% for the current year.

Ruth's Hospitality Group’s long-term earnings growth rate is projected at 14.3%.

Dine Brands Global reported better-than-expected earnings in the trailing four quarters, the average beat being 8.1%.

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