Starbucks' 4Q results may signal economic recovery brewing

Call it reading the latte foam instead of the tea leaves.

Some people view Starbucks as a leading economic indicator, a signal of what's coming for the economy based on what people drink when they awake.

Safeway CEO Steven Burd is one such prognosticator.

When the recession started, his customers shifted from buying lattes to regular coffee at Safeway's in-store Starbucks stores.

Then in fall 2009 he told investors hopefully, "It's early, but we're seeing a trend back to lattes." That shift and a move to higher-priced wines suggested to him "that we're at, or near, the bottom of this whole thing, and that would be good for all of us if that's true."

Burd should be thrilled about the numbers Starbucks released Thursday. They showed a whopping 86 percent profit gain to $278.9 million for the quarter ended Oct. 3. The chain's net revenue climbed 17 percent to $2.8 billion.

For the fiscal year, Starbucks' profit rose 142 percent to $945.6 million on revenue that climbed 10 percent to $10.7 billion.

The world's largest coffee-shop chain appears to be pulling out of a dark period in which it closed hundreds of stores, laid off thousands of workers and posted its first quarterly loss ever.

But unlike summer 2007, when the coffee chain was one of the only retailers signaling problems as the economy continued to expand, it is not alone in bouncing back.

Restaurants in general are doing well and are good indicators of what's coming in the overall retail sector, said Sharon Zackfia, who follows Starbucks for William Blair & Co.

"People have to fill their stomachs multiple times a day, but you don't think about buying a television multiple times a day," she said.

Restaurant sales also give a snapshot of how people feel about their finances.

"It's a real-time barometer of consumer confidence, better than any survey I've ever seen," Zackfia said.

That's especially true of casual restaurants and places like Starbucks, which are not at the bottom of the restaurant food chain.

Inexpensive fast-food joints sometimes do better in a down economy, because people who are still eating out will trade down until they reach fast food.

"It's almost like Wal-Mart doing better during the recession; it's a different dynamic," Zackfia said.

Starbucks' strong profit report puts it near the top of the group, she said, a reflection of the changes it has made to improve performance.

She was particularly encouraged by the 8 percent growth in same-store sales, a popular gauge of how well a chain's older stores are performing.

"It's certainly going to be among the best in all the [publicly traded] restaurants, although Chipotle [Mexican Grill] at 11 percent is probably the best," Zackfia said.

Overall retail sales have been stronger lately, too, buoying hopes of a recovery because that measure represents 70 percent of economic activity.

Any single company's good news pales next to that broad measure, said Ed Weller, managing director of ThinkEquity in San Francisco.

"If we have a trillion dollars' worth of evidence leading to that conclusion, why do we need a billion dollars' worth of evidence coming out of Starbucks to confirm it?" Weller said.

Investors applauded Starbucks' report. Shares rose 65 cents to $29.75 in regular trading before the earnings report, and climbed 75 cents more to $30.45 in after-hours trading.

During a conference call with analysts, Starbucks CEO Howard Schultz said the company is ending a partnership with Kraft Foods, which distributes its coffee and other products to grocery stores.

"A month ago, we informed Kraft that we plan to discontinue our distribution arrangement," Schultz said. He declined to say why Kraft is out or who will replace it.

Before Starbucks hired Kraft in 1998, it sold coffee in grocery stores in just 12 states, using 50 independent brokers for distribution.

Now, Starbucks products are in grocery stores in 11 countries.

Through Kraft, it sells packaged coffee in the U.S. and Canada, tea in the U.S., and single-serve coffee containers in Austria, Canada, Germany, Ireland, Spain, the U.K. and the U.S.

Starbucks uses other channels to get products like ice cream, bottled Frappuccino — and beginning this year, Starbucks' Via instant coffee — onto grocery shelves.

Via sales totaled $180 million during the fiscal year, about 80 percent from the U.S., Starbucks Chief Financial Officer Troy Alstead told analysts on the call.

The instant coffee is now sold in the U.S., Canada, Japan, the Philippines and the U.K.

The company invested a lot of money to launch and market Via, so it essentially broke even on the product this year, Alstead said.

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