Starbucks Down 9% Since Announcement of 150 Store Closures

Company also increases buyback and return target to $25 billion

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Jun 20, 2018
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Shares of ubiquitous coffee chain Starbucks (SBUX, Financial), a stock in the portfolios of investors Jerome Dodson (Trades, Portfolio) and Frank Sands (Trades, Portfolio), plunged 9% Wednesday after it announced it would close 150 stores in 2019 – triple the amount it usually shutters in a year.

Starbucks disclosed the news in an announcement listing “strategic priorities and operational initiatives,” saying it would triple the amount of closures from its historical average of up to 50 per year. The stores closed will be underperforming locations in its most densely penetrated markets. The move comes as part of its plan to “optimize” its portfolio by also concentrating new stores in markets where it has fewer stores and slowing growth of its licensed stores.

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The changes will cause a lower growth rate of net new company stores, the company said.

As of March 31, Starbucks operated 27,339 retail stores.

For 2019, Starbucks said it expects to open about 2,300 net new stores globally, with 1,100 of them opening in the China/Asia Pacific region and 900 in the Americas, amounting to a 3-5% increase.

The coffee juggernaut’s growth has been torrid over the past five years, with annual growth rates of 12.8% for revenue, 77% for earnings per share and 4.4% for book value.

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But its net margins have been declining in recent years, indicating competitive pressure. Starbucks reported a net margin of 12.89% in 2017, a decline from 13.22% in 2016 and 14.39% in 2015. Return on assets also lost ground over the same period, totaling 20.12% in 2017, 21.08% in 2016 and 23.8% in 2015.

Starbucks’ comparable store sales rose 2% in the its second quarter ended April 1, primarily due to 3% higher average cost per ticket. Revenue growth reached 14% to $6.0 billion.

The company has been engaged in restructuring and streamlining plans since the fourth quarter of fiscal 2017 to drive growth in its high-returning businesses and axe its “non-core,” slow-growth operations, according to a quarterly filing. So far, their efforts have included closing its Teavana stores, selling the Tazo brand and acquiring its East China joint venture.

Starbucks’ China/Asia Pacific segment was by far its fastest-growing, with revenues soaring 54% to $1.2 billion in the second quarter, fueled by its acquisition and the opening of 759 net new stores over the previous 12 months, second only to its Americas segment, where it opened 966 net new stores.

Starbucks also said it would give shareholders $25 billion in cash via buybacks and dividends for fiscal year 2020, increasing its previous target announced in November by $10 billion.