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Originally published July 22, 2009 at 12:00 AM | Page modified July 22, 2009 at 12:50 PM

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Starbucks tops earnings expectations on cost cutting

Starbucks' revenues fell and traffic into its stores continued to slow in the quarter ended June 28, but investors were thrilled with the company's $151.5 million profit.

Seattle Times business reporter

Although Starbucks' revenues fell and traffic into its stores continued to slow, investors were thrilled with the company's $151.5 million profit for the quarter ended June 28.

Shares climbed $1.46, or almost 10 percent, to $16.15 in after-hours trading Tuesday after the earnings announcement. During regular trading, shares fell 23 cents to $14.69.

"It was a quarter driven by cost cutting and getting out of unproductive stores and unproductive leases," said Edward Jones analyst Jack Russo.

Of the roughly 900 stores the coffee-shop chain plans to close worldwide, it now has shut 676 in the U.S., 61 in Australia and 28 in other international markets.

Starbucks shops are closing faster than they're opening, a dramatic shift from two years ago, when it opened an average of seven stores a day.

The chain now expects to end its fiscal year, on Sept. 27, with 30 fewer stores than it began the year.

Starbucks cut $175 million from expenses during the quarter. Some savings came from closing unprofitable stores but mostly were through eliminating corporate jobs and exiting corporate-office leases ($60 million), and finding in-store efficiencies like new ways to steam milk that reduce the amount that's thrown away, and better ways to load pastry cases so that less labor is required (another $60 million), Chief Financial Officer Troy Alstead said in a telephone interview.

After Starbucks slashes an expected total of $550 million in costs this fiscal year, it will focus on new ways of supporting its stores and improving the customer experience, "which is more important than cost-reduction efforts," Alstead said.

Starbucks spent $51.6 million in the quarter on restructuring charges, mostly to exit leases and pay other costs associated with store closures. Without the restructuring charges, it earned 24 cents a share during the quarter, 5 cents better than analysts had predicted, according to Thomson Reuters.

A 7 percent drop in quarterly revenue, to $2.4 billion, means Starbucks has not emerged from a financial quagmire that began in 2007 and worsened as the economy slowed.

The only business unit that saw a revenue gain was its smallest, the global consumer-products group that markets products like ice cream and bottled Frappuccino. That unit posted a 17 percent revenue gain to $106.3 million.

Last summer, Starbucks posted its first quarterly loss as a public company and its shares sank to a 52-week low as investors digested news that it would close 600 U.S. stores. Since then, an additional 200 U.S. stores were slated for closure. All 800 are scheduled to close by Sept. 27.

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In a conference call with analysts, CEO Howard Schultz touted the company's improving transaction trends.

Starbucks' same-store sales were down 5 percent, better than the previous two quarters' declines of 8 and 9 percent. That measure has not been positive since late 2007.

Schultz also said Starbucks' new advertising and social-media campaign has been successful, citing its 3.6 million self-declared fans on Facebook — more than Coca-Cola, the movie and book series "Twilight," or Facebook itself. He reiterated that the firm is not spending any more on brand awareness than it used to, but has redirected money it used to spend more locally into one concerted effort.

Starbucks isn't the only company working to "raise the level of awareness and trial in the category," said Schultz. He didn't name the others, but McDonald's has been spending heavily on coffee advertising.

"People forget that despite [being in] 50-plus countries and thousands of stores, we have less than 10 percent share of the U.S. coffee consumption and less than 1 percent of coffee consumption outside North America," he said. "The size of the prize is still very large for Starbucks."

Still, he cautioned that investors should not be overly optimistic.

"One quarter does not make a trend," Schultz said. Starbucks has "competitors that have a much bigger appetite and advertising muscle than we do. The headwind is still in front of us."

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

Copyright © 2009 The Seattle Times Company

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