Coffee giant posts mixed earnings, plans to shutter tea division
Brands just can’t escape a challenging retail environment — a main reason Starbucks is pulling the plug on its Teavana operation.
Just hours after the coffee giant announced it would buy out the remaining 50% share of its East China business from its joint venture partners for about $1.3 billion — its biggest acquisition, ever — Starbucks is cutting loose its Teavana division.
Blaming soft retail and hospitality environments, many of the company’s principally mall-based Teavana retail stores have been persistently underperforming. Following a strategic review of the Teavana store business, the coffee giant will close all 379 Teavana stores over the coming year. A majority will close by spring 2018, according to Starbucks.
Lower mall traffic also impacted Starbucks’ overall performance in the third quarter, ended July 2. Net income slipped to $691.6 million, or 47 cents per share, for the quarter, down from $754.1 million, or 51 cents per share, a year ago.
Net revenues grew 8% to a Q3 record $5.7 billion. This was a 9% increase after excluding $53.7 million of unfavorable foreign currency translation. This met Wall Street's estimates for revenue of $5.76 billion, according to The Street.
Global comparable store sales increased 4%, and Americas comp store sales increased 5%. U.S. comp store sales increased 5%, driven by a 5% increase in average ticket. This increase was credited to the shift in the Starbucks Rewards loyalty program from a frequency-based to the amount spent. This change took place in the third quarter of the fiscal year 2016.
Meanwhile, comp store sales in China jumped 7%. This was driven by a 5% increase in transactions.
“Starbucks leveraged food and beverage innovation, an elevated in-store experience and personalized digital connections to our customers to deliver another quarter of record financial and operating performance, despite the softness impacting our principal sectors overall,” said Kevin Johnson, Starbucks president and CEO. “Continued focus on execution against our strategic priorities enabled us to gain share and positions us well for the future.”
Looking ahead, Starbucks did temper its expectations going into the fourth quarter. “Despite posting record performance in Q3 and further extending our lead compared to the industry overall, the combination of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors has us a bit more cautious going into Q4,” said Scott Maw, Starbucks CFO.
Border tariff removed from tax reform plan
The import tax proposal has officially been removed from the tax reform plan — which is welcome news for retailers across the industry.
On Thursday, congressional and administration leaders announced they would remove the Border Adjustment Tax (BAT) from consideration, and announced an outline for comprehensive tax reform. The BAT provision would have ended importers’ ability to deduct the cost of merchandise purchased from other countries.
The tax was initially considered a way to fund tax cuts, but it prompted a fierce backlash from retailers, as well as other import-dependent industries and activists that argued the tax would result in higher prices for consumers. The National Retail Federation estimated this tax could have costed the average family as much as $1,700 annually.
“By removing this costly element of reform, the way has been cleared for swift action on a middle-class tax cut that will put more money in the wallets of the American taxpayer,” NRF president and CEO Matthew Shay said. “Changing our outdated tax code is fundamental if we are to grow our economy, encourage investment and create jobs.”
"Today's announcement is an important victory for American families and businesses who desperately need tax reform and who would have been harmed most by the border adjustment tax," said Sandy Kennedy, president of RILA. "With BAT out, Washington has an opportunity for the first time in more than a generation to pass a tax reform plan that boosts American businesses and family budgets.”
The decision supports retailers, as merchants “pay the highest effective corporate tax rate of any sector of the U.S. economy,” NRF’s Shay said. “Broadening the tax base and lowering the corporate tax rate will allow our industry to compete effectively in the global marketplace, particularly without the additional burden of a border adjustment tax. In the end, our workers and the consumers they serve are the ultimate beneficiaries of this effort.”
Members of NRF, RILA as well as executives from national brands have been diligent and vocal in their efforts to get the tax consideration removed. In May, 20 retail executives traveled to the nation's capitol to voice their opposition to the proposed border adjustment tax (BAT). The delegation included leaders of small businesses, such as Random Harvest from Virginia and Washington, D.C., as well as executives from national retail brands, including Ascena Retail Group, AutoNation, BJ’s Wholesale Club, Dillard’s, Ikea, Levi Strauss, Pier 1 Imports and QVC.
Republicans have reiterated that they are committed to passing comprehensive tax reform that lowers rates without creating a new border tax that would shift the burden to consumers. They also reported they plan to start to work on a joint tax plan through committees by this fall, according to CNBC.
Coffee giant makes a blockbuster deal in China
Starbucks Coffee Company has closed the biggest transaction in its history.
The coffee giant is buying the remaining 50% share of its East China business from long-term joint venture partners, Uni-President Enterprises Corporation and President Chain Store Corporation. The deal is worth approximately $1.3 billion (USD) — the largest single acquisition in the company’s history, according to Starbucks.
Through the transaction, the retailer will assume 100% ownership of approximately 1,300 Starbucks stores in Shanghai and Jiangsu and Zhejiang Provinces — a move that builds on the company’s ongoing investments in China. Specifically, the deal puts Starbucks on pace to meet its goal of operating more than 5,000 stores by 2021.
“Unifying the Starbucks business under a full company-operated structure in China reinforces our commitment to the market, and is a firm demonstration of our confidence in the current local leadership team as we aim to grow from 2,800 to more than 5,000 stores by 2021,” said Kevin Johnson, president and CEO, Starbucks Coffee Company.
According to Starbucks, China is the chain’s its fastest-growing market outside of the United States in terms of store count. In East China alone, the chain operates nearly 600 stores in Shanghai, the largest number of stores globally of any city where Starbucks has a presence.
In December, Shanghai will also be the first city outside of the United States to welcome the opening of the ultra-premium Starbucks Reserve Roastery. This concept store, which debuted in Seattle in late 2014, will be dedicated to roasting, brewing and packaging rare, small-batch Starbucks Roastery Reserve coffees from around the world. http://www.chainstoreage.com/article/coffee-giant-open-massive-location-chicago
“Full ownership will give us the opportunity to fully leverage our robust business infrastructure to deliver an elevated coffee, in-store third place experience and digital innovation to our customers, and further strengthen the career development opportunities for our people,” said Belinda Wong, CEO, Starbucks China. “Our East China partners’ relentless pursuit of operational excellence and leadership has provided us a solid foundation to maximize the unprecedented growth opportunities ahead and we look forward to extending our world-class network of unique programs to support their personal and professional dreams.”
In a separate deal, UPEC and PCSC will acquire Starbucks’ 50% interest in President Starbucks Coffee Taiwan Limited (Taiwan JV) for $175 million, giving the companies 100% ownership of Starbucks operations in Taiwan. The deal is worth $175 million. Taiwan JV currently operates approximately 410 Starbucks stores in Taiwan.
“Similar to our decision in 2011 to fully license our Hong Kong and Macau market operations, we are pleased to transition our business in the Taiwan market to our long-time partners Uni-President Enterprises Corporation and President Chain Store Corporation, both highly-recognized local operators, as we continue to grow in Taiwan,” Johnson added. “This is a critical next-step as we advance our multifaceted China growth strategy for long-term profitable growth in Asia.”
Both deals will close in early 2018.