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Starbucks lags in coffee buying despite market dip

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Starbucks revealed it had remained behind last year in fixing ahead its coffee costs, despite the retreat in prices since April, adding that a boost from lower values was near its end.

The US-based group, the world's biggest coffee-shop chain, said that it had priced ahead some 60% of its bean needs for its next financial year, which begins in October.

That is above the 40% it had priced in as of its last investor update, in April, when it revealed it had slowed its purchases as futures soared, lifted by drought in Brazil which cut sharply expectations for this year's harvest from the top producing country.

However, it is behind the 80% it had priced forward, for the 2013-14 financial year, as of a year ago.

Coffee costs

New York Arabica coffee futures have fallen some 14%, on a front contract basis, since Starbucks' April update, but remain some 40% higher year on year.

Starbucks said that its coffee costs for its next financial year were, thus far, around the levels of a year before, although the final bill would depend on the future course of prices.

"We have about 60% of our coffee needs price locked for next year, and those prices are roughly flat to this year, up perhaps little bit," Scott Maw, the group's chief financial officer, said.

"Where we actually end up for the year, we still think that it will be roughly neutral, but it will depend on how we lock in that last 40%.

"So right now, we're thinking neutral, perhaps up to a little bit. If coffee prices come down, there may be an opportunity to ease that a bit."

Higher margins

A return to flat coffee costs would end a period of lower bean bills which have supported a rise in group profits.

The group's channel development business reported a 13% rise to $375.3m in sales in the April-to-June quarter, but a 45% jump to $139.5m in operating profits, as "operating margin increased 800 basis points to 37.1%, primarily due to lower coffee costs and improved inventory management".

Group earnings rose 23% to $512.6m, equivalent to $0.67 per share, marginally ahead of Wall Street expectations on revenues up 11% at $4.15bn, helped also by increased US food sales.


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