Starbucks shares tumble on fears of slowing US growth

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Starbucks Corp's shares on Friday were on track for their worst one-day decline in five years as the coffee chain's latest quarterly report triggered concerns of a slowdown in sales in the US, its largest market.

SBUX.O on Nasdaq /Source: Reuters

While Starbucks' profit met Wall Street expectations in its first quarter under new CEO Kevin Johnson, the results suggested that growth in the coffee chain's member loyalty program was slowing, a trend that could impact future sales.

Starbucks' membership reward program rose 8% in the US quarter ended on July 2. A rate that lags the 18% increase seen a year earlier and slower than the previous quarter's 11% rise.

"Customers were choosing to spend their money elsewhere," Johnson said on Friday, calling it a "short-term phenomenon."

Starbucks President and Chief Operating Officer Kevin Johnson speaks at the Annual Meeting of Shareholders in Seattle, US on March 22, 2017. /AFP Photo

But analysts said the slowdown was a direct result of changes Starbucks made to its rewards program. While creating a benefit for the company, it left many customers unwilling to sign up.

Starbucks last year tweaked the program to award customers points for every dollar spent at its cafes, a departure from its practice of giving points for every purchase, putting customers buying cheaper items at a disadvantage.

The slowdown in the loyalty program adds to concerns about Starbucks' US business that is already struggling in the face of mounting competition from restaurants, meal kit sellers and convenience stores.

"With (loyalty) growth continuing to slow, we fear US same store sales are unlikely to maintain the mid-single digit range that the market has come to expect," Credit Suisse analysts said in a report.

Sales at Starbucks' mainstay US cafes open at least 13 months rose 5% in the latest quarter.

Analysts cast doubts about the Seattle-based company's ability to meet its long-term earnings and revenue targets after Starbucks also trimmed its current-quarter earnings forecast on Thursday.

Starbucks has said it expects to grow earnings by 15% to 20% and revenue in the double percentage digits over the long term.

Those targets "may no longer be realistic," analysts at Wedbush Securities said, pointing to several quarters of underperformance and the lack of "a clear path" to same-store sales re-acceleration.

Eight analysts lowered their 12-month targets on Starbucks' share price to as low as 56 US dollars. The median price target is 66 US dollars.

Starbucks' shares were down 8.3% at 54.55 US dollars and the company was on course to shed about 7 billion US dollars in market value.

Amid worries that growth at home was cooling, Starbucks is making long-term investment in China. The company is set to own 100% of its China branches after striking a deal to buy out its joint venture partner for 1.3 billion US dollars.

"We think it's a prudent thing to do," said Johnson. "Starbucks' opportunity for growth in China is unparalleled," he added.

(With inputs from Reuters)

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