Starbucks Will Show Q4 Loss of $2.12 Billion Following $2.7 Billion Fine

The net result of an arbitrator imposed fine of $2.7 billion on Starbucks SBUX in a contract dispute with Kraft KRFT, will be a fourth-quarter operating loss of $2.12 billion, according to Reuters.

Prior to the arbitrator’s decision, the company had reported a 34 percent increase in Q4 EPS resulting in a record $0.63/share. The company said it would now show a loss of $1.64 per share for the quarter that ended September 29.

The dispute arose when Starbucks prematurely ended a contract that allowed Kraft to sell Starbucks-branded coffee in grocery stores. Starbucks ended the arrangement in 2010, handing it over to Acosta at that time.

Since the original contract was set to last until 2014, Kraft filed a lawsuit, demanding Starbucks pay a fair value for the lost business. Starbucks said in 2010 that Kraft had failed to follow the terms of the contract and that its decision to terminate was legal.

Related: Starbucks Concludes Packaged Coffee Dispute with Kraft

Since the final decision was the result of binding arbitration, Starbucks has no right to appeal. The company did issue a statement through CFO Troy Alstead who said, "We strongly disagree with the arbitrator's conclusion. We believe Kraft did not deliver on its responsibilities to our brand under the agreement."

Alstead added, "Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders."

Mondelez International MDLZ, which spun off Kraft in 2012, will receive all of the proceeds. General Counsel for Mondelez, Gerd Pleuhs said in a statement, "We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation."

Although shares of Starbucks were down 0.9 percent in early trading Wednesday, by late morning shares had recovered and even gained slightly, trading at $80.73, up $0.12 or 0.14 percent. Mondelez was up $0.75 or 2.3 percent at $33.18 in late morning trading.

In a research note reported on by Jim Cramer’s The Street, Sanford Bernstein analyst Sara Senatore indicated the impact of the fine on Starbucks would be "negligible." Senatore said that if Starbucks didn't initiate share repurchases in 2014, the overall impact to earnings would be about four cents a share.

As for Mondelez, Senatore said, “The after-tax proceeds of [approximately] $1.7 billion used for share repurchases would add $0.05 to EPS.”

At the time of this writing, Jim Probasco had no position in any mentioned securities.