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UPDATE: Starbucks's Struggles in Europe Pressure Profitability
13/6/2012
01:36

--CFO Troy Alstead says Starbucks is struggling with economic woes in Europe

--Starbucks also faces issues with stores' operating efficiency in Europe

--CFO expects challenges in Europe to progress into 4Q and continue for 'a while'

(Updates with additional comments from Starbucks and Dunkin' Brands.)

 
   By Annie Gasparro 
 

Starbucks Corp. (SBUX) said its business in Europe is struggling "more than expected" in the current quarter, as economic uncertainty is hurting the coffee giant's ability to orchestrate a turnaround in the region.

Chief Financial Officer Troy Alstead said Tuesday the challenges in Europe, combined with other headwinds, caused the company to reduce the high end of its annual earnings forecast by two cents per share last week. It's also being pressured by costs for acquiring La Boulange bakery and increased investments in its line of consumer products

"We continue to struggle, as many have, with the macro challenges that we face in Europe. Those challenging trends have continued for us even more than we had expected as we are in this third quarter," Mr. Alstead said.

He said Starbucks now expects the high end of its fiscal third- and fourth-quarter earnings to be 45 cents and 47 cents a share, respectively, lowering each by one cent.

Starbucks concedes that some of its European woes are a result of its own mistakes, such as where it chose to open stores, particularly some in the U.K. The company also says its store operations, from customer interaction to cost management, haven't been strong in the region. These are "things that we need to do something about," Mr. Alstead added.

Starbucks sent executive Michelle Gass to head up the revamp, since she had a hand in the U.S. comeback a few years ago.

In the latest quarter, EMEA saw a 1% decline in same-store sales, as executives admitted the turnaround wouldn't happen overnight.

Starbucks is expected to announce its third-quarter results in late July.

"We aren't done with the third quarter yet, but with the visibility we have here towards the end of it, it's clear that we'll have increased pressure from [the Europe, Middle East and Asia, or EMEA division] in this third quarter," Mr. Alstead said. "And obviously we don't know how that will progresses into the fourth quarter, but my expectation is that we are living in a tough EMEA environment here for a while."

Europe contributes just a small piece of Starbucks' overall profits, compared with the U.S. cafes, which are its biggest business. Still, Mr. Alstead said its weakness in Europe, particularly the U.K., is a "nagging piece" of the portfolio.

Mr. Alstead says Starbucks' ability in Europe to execute its supply chain, deploy labor or manage waste at the store level isn't "anywhere near as effective and competent as we've become in the U.S. over the last few years."

He says Starbucks also never put its "best foot forward" in engaging in with the consumers.

"Much of our effort now is about taking [what we've learned] and putting it in place in this region," Mr. Alstead said.

In April, Starbucks reported that its fiscal second-quarter earnings rose 19%, on strong sales in China and the Americas.

Starbucks shares have risen more than 50% over the past year, closing Tuesday at $53.04. The company in April reported that its fiscal second-quarter earnings rose 19% with strong sales in China and the Americas.

Starbucks has been ahead of rivals in both the U.S. coffee industry and quick-casual restaurant sector with its international expansion.

Competing coffee shop Dunkin' Donuts, owned by Dunkin' Brands (DNKN), has little exposure to Europe at this point, but "we see it as an opportunity going forward," Chief Executive Nigel Travis said at a conference Tuesday. It's international doughnut shops have struggled to return profits, so Dunkin' says it is focused on repairing operations before expanding overseas.

-Write to Annie Gasparro at annie.gasparro@dowjones.com

(END) Dow Jones Newswires

June 12, 2012 18:36 ET (22:36 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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