Starbucks touts big profit, plans to grow in China
Starbucks boosted revenues by 12 percent during the third quarter ended July 3 and posted a profit of $279 million. The company plans to open 200 new stores in the U.S. next year and 600 internationally, about a quarter of them in China.
Seattle Times business reporter
New stores in the United States.
New stores internationally, the biggest chunk in China but also in India, Brazil and elsewhere.
Starbucks' rehabilitation appears complete.
The Seattle coffee juggernaut that had opened seven new stores a day in 2007 had to undergo painful surgery, cutting almost 1,000 stores and 35,000 jobs.
Sales, profits and morale suffered.
Now Starbucks is back, posting strong sales and blowing analysts' minds with phrases like this: "Comps in China accelerated this quarter to a level in the mid-30s."
Comps are comparable-store sales, the main way Starbucks gauges the performance of stores that have been open for more than a year. It erases sales at new stores, which grow fast because they start at zero.
In Starbucks' expansion heyday, comps grew by 10 or 11 percent. Its first sign of weakness back in 2006 was a drop in comps, which lately have been around 7 and 8 percent.
Anything with a 30 is "jaw dropping," as one analyst called the China figure during a conference call with Starbucks executives Thursday as they announced third-quarter results.
It certainly explains why Starbucks is excited about China, where it expects to almost double its 800 stores over the next four years.
As CEO Howard Schultz put it on the call, "The hardest part is to make sure you do not become white hot, and then all of the sudden out of favor."
To some extent, that is what happened in the U.S., where Starbucks has 11,000 of its 17,000 shops.
Still, Schultz said the company is not finished with U.S. growth.
"For anyone to conclude that the U.S. market is reaching a level of saturation for us, I think would be a wrong conclusion," he said.
Starbucks plans to open 200 new stores in the U.S. next year and 600 internationally, about a quarter of them in China.
Some of the new stores will be in India, where Starbucks plans to debut next year, and Schultz said Brazil will become another big market for the coffee-shop chain.
"Brazil is a market that we think can have 1,000 stores, at least, and we are sitting with less than 100," he said.
Starbucks executives were unusually candid about their international markets on Thursday.
Chief Financial Officer Troy Alstead explained why Starbucks' total international comps were just 5 percent when China was so strong. "The softest market we had was our largest international market, and that's in Canada."
Canada's comps were positive, but lower than usual, in part because of tax issues and the weather, he said.
Overall during the third quarter ended July 3, Starbucks boosted revenues by 12 percent to $2.9 billion.
Its profit of $279 million, or 36 cents a share, beat Wall Street estimates by 2 cents, which at first sent the stock up rapidly.
A few minutes after Starbucks' earnings were announced around 1 p.m., shares shot up more than $2, quickly crossing the $41 a share mark and approaching a new 52-week high.
The stock settled around $40, as investors saw that Starbucks expects high coffee prices, carving about 22 cents a share out of profits this year, are expected to do almost as much damage in fiscal 2012.
That sobering news was balanced by improved expectations for earnings this year.
With just one quarter left, Starbucks said its fiscal 2011 profit will be $1.50 to $1.51 a share, up from its earlier estimate of $1.46 to $1.48 a share.
Starbucks also posted one of its strongest quarters.
Revenues at U.S. stores rose 9 percent to $2 billion. Operating income for U.S. stores climbed a whopping 30 percent to $379 million, partly because of cost-cutting and partly because last year's third quarter included a $17 million restructuring charge for U.S. store closings.
In its smaller international business, Starbucks' revenues climbed 20 percent to $659 million, while operating income was up 44 percent to $80 million. Last year's third quarter included a $3.5 million restructuring charge for international stores.
Starbucks' packaged-goods business, which includes coffee sold in grocery stores, posted a 25 percent boost in revenues to $218 million. That unit's operating income rose 20 percent to $66 million.
The company plans to start selling K-Cups in grocery stores this fall. K-Cups are single-serve helpings of ground coffee that come in plastic cups that people insert into Keurig coffee machines.
The technology is owned by Green Mountain Coffee Roasters of Vermont, which bought the wholesale business of Seattle-based Tully's Coffee a couple years ago.
Until now Starbucks has been notably missing from the array of K-Cup offerings, because until last year it had a relationship with Kraft Foods that relegated its coffee to Kraft's less popular T-Disc technology. Ramping up the K-Cup line will add costs to Starbucks' packaged-goods business, which executives said will post lower margins next year.
Schultz, who has become an avid bicyclist in recent years, used that sport's terminology to explain why Starbucks will start selling K-Cups in grocery stores before its own cafes.
"We're going to draft off the momentum that already exists on K-Cups in the channels that they are already in," he said.
Melissa Allison: 206-464-3312 or firstname.lastname@example.org
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