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Starbucks Takes a Tumble Over Sales Slump

- By Nash Riggins

Starbucks (SBUX) shares tumbled 5% after hours Thursday after the coffee giant reported falling short of Wall Street's third-quarter sales expectations.

A flurry of new store openings helped the chain to post a four percent increase in global comparable sales - pushing consolidated net revenues up 7% to $5.2 billion.

GAAP operating income also shot up 9% year over year to shatter the $1 billion mark, which is the first time in Starbucks history that the company has brought in over $1 billion during a non-holiday quarter. Across the board, third-quarter net income rose 20% to $754.1 million.

As a result of that success, the company's GAAP EPS increased by 24 points to hit 51 cents per share for the quarter. Non-GAAP EPS came in at 49 cents.

Yet while Starbucks fell right in line with Wall Street's earnings expectation for the quarter, disappointing sales figures pushed share prices down just over 5% in late trading Thursday.

The chain reported a global same-store sales increase of 4% for the third quarter of 2016. Analysts had been expecting the chain to hit 5.7% - and expectations fell flat across every single market.

Wall Street anticipated sales growth of 6.2 percent in the Americas, 4.6 percent in Asia and 2.8 percent in Europe, the Middle East and Africa (EMEA). By contrast, Starbucks delivered sales growth of just 4% in the Americas, 3% in Asia, and sales actually contracted by a point in EMEA.

Despite a slow in growth, net revenues in the company's U.S.-dominated Americas segment actually increased 7% year over year to hit $3.6 billion for the quarter. Bearing in mind that sales growth has actually slowed, that rise can be pegged largely on incremental revenues from 730 net new store openings across the last 12 months.

Starbucks has also implemented several recent price hikes across a range of products available across the Americas, and bosses have stirred the pot by taking on a major shakeup of the chain's popular loyalty program.

Yet according to CEO Howard Schultz, those incremental price hikes have nothing to do with the company's disappointing third-quarter sales.

In a conference call with investors Thursday, Schultz said the blame fell largely upon waning consumer confidence, geopolitical turmoil and market uncertainty.

"In Starbucks' 24 years of public life, I can't recall a quarter quite like Q3 of 2016, when a confluence of social and political turmoil at home, weakening consumer confidence, increasing global uncertainty, and the launch of one of our most significant long-term initiatives of all-time all occurred within a single earnings period," he said.

"In light of these circumstances, it would not be unreasonable to simply celebrate another quarter of record revenues and record EPS, our first non-holiday quarter with $1 billion of operating income, and operating performance well above our competitive set and at the very top of our sector."

There appears to be merit in Schultz's assertion that the wider coffee and fast-food industries are indeed suffering from a notable degree of consumer pessimism. Starbucks rival Dunkin' Brands Group blatantly missed revenue expectations Thursday after reporting relatively static sales for the quarter ending June 25.

According to CEO Nigel Travis, the sector is suffering from "some kind of mini malaise". That being said, Travis did go on to admit that lackluster sales at iconic brands like Dunkin' Donuts (DNKN) were quite possibly driven by a pattern of overpriced items.

Looking forward to the rest of 2016, Starbucks has reaffirmed its intention to post adjusted full-year earnings of at least $1.88 a share for the fiscal year. Yet the chain has also slightly lowered its sales forecast, and is now anticipating full-year growth in the "mid-single digits."

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This article first appeared on GuruFocus.