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Originally published Thursday, July 31, 2008 at 12:00 AM

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Schultz sure Starbucks will come out ahead

Fresh from spending an hour on the phone explaining Starbucks' first quarterly loss to Wall Street analysts, CEO Howard Schultz was relaxed and focused. The company has challenges, he said in an interview Wednesday, but succumbing to competition from coffee-brewing rivals is not one of them.

Seattle Times business reporter

Fresh from spending an hour on the phone explaining Starbucks' first quarterly loss to Wall Street analysts, CEO Howard Schultz was relaxed and focused. The company has challenges, he said in an interview Wednesday, but succumbing to competition from coffee-brewing rivals is not one of them.

"Our customers are not turning away from Starbucks because they're unhappy or they have lost faith or they don't like the experience," he said. "They just do not have the disposable income to come as often as they once did."

Seated in an armchair at his office in the company's mermaid-topped headquarters, Schultz said recent job cuts and store closures have been "painful and difficult" but "will ultimately make us a much stronger company."

Starbucks lost money for the quarter largely because of $167.7 million in restructuring charges to pay for closing 616 stores nationwide.

Including those one-time charges, Starbucks lost $6.7 million, or a penny a share, during the third quarter ended June 29. That's down from a profit of $158.3 million, or 21 cents a share, a year ago.

Without those charges, there would have been a profit of 16 cents a share — still below the 18 cents analysts expected, according to Thomson Financial.

The coffee giant had not reported a quarterly loss since going public in 1992.

This quarter, it was plagued by continued reduced traffic in the U.S., a slight decline in U.K. traffic and slower sales growth in Canada.

Starbucks slowed its growth plans again Wednesday, saying it will open 900 new stores in the U.S. this year, instead of 1,000. Next year it will close more U.S. stores than it opens.

International store openings will slow to 825 this year from the previously projected 975.

The news came a day after Starbucks announced 1,000 job cuts and the closure of most of its stores in Australia.

In explaining the challenges, Schultz on Wednesday blamed the troubled economy more than he has in the past. All along, he's said Starbucks does not consider the economy an excuse for declining U.S. sales.

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But now the company's research has shown its customers have shrinking disposable income, so the purveyor of $3 and $4 lattes has to find a way to bring them back.

So far, the plan includes introducing new and sometimes more affordable drinks and offering special savings for people who use the stored-value Starbucks Card.

Schultz said the economic headwinds have become stronger since he reassumed the role of CEO in January, though the difficulties aren't always evident around here.

"You look around Seattle, and there are cranes everywhere building new office buildings and residential buildings and all these condos. If you travel around the country as I do, there's a very different level of concern and pressure on the consumer."

With store traffic declining slightly in Britain, Starbucks is being cautious about adding stores in Spain and other Western European countries.

But business is strong in Mexico, the Middle East, Brazil, Argentina, the Philippines, China and Russia, Schultz said. "I was in Prague and in Poland two months ago. ... These are places where I think we're going to do very well," he said.

Closing the Australian stores was necessary because the market had high rent and expensive labor, Schultz said.

He wants to do more with the Starbucks Card, which is used by one in every seven Starbucks customers. He wouldn't disclose the total number of users, but said a million have signed up in the past few months since Starbucks added new benefits.

"Unlike a fast-food restaurant or a quick-service restaurant, we don't want to get into the game of happy meals and deep discounts," he said. "The Starbucks Card is the perfect place" to build on the company's brand in new ways.

For the most part, analysts have written off this fiscal year, which ends Sept. 28, and are looking to the future.

"I wouldn't get too caught up in the loss, because they wouldn't have had that loss if they didn't have one-time charges," said Jack Russo, an analyst at Edward Jones in St. Louis.

Investors seemed to agree, sending Starbucks shares up 65 cents, or 4.4 percent, to $15.32 in after-hours trading following release of the earnings.

"The big issue is what is being done to correct this," Russo said. "It's going to take time, and people have to be patient here. It would be helpful to get a boost from the economy, and that remains to be seen."

Schultz, 55, has been on a personal turnaround plan, as well. He acknowledged with a chuckle that people have remarked on his thinness and wondered whether he is healthy.

"For the past year, I have been on an exercise-and-diet plan, and then I became a cyclist. So I've lost weight, but I'm fine. I know people have said that, but I'm totally fine," Schultz said.

Before leaving his office to address about 1,500 employees about the job cuts and the company's strategy, Schultz made a prediction.

"This is a long story, and unfortunately the current chapter is not a positive one," he said, "but I think when people look back at this time they will recognize that the people who wrote Starbucks off were very shortsighted."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

Copyright © 2008 The Seattle Times Company

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