Melissa Allison follows the world's biggest coffee-shop chain and other Seattle caffeine purveyors.
Starbucks to put Seattle's Best Coffee in 9,000 U.S. Subway shops by year-end, Schultz says
Posted by Melissa Allison
Starbucks is backing away from its long-held dislike of fast food to partner nationally with Subway. Its Seattle's Best Coffee brand will be in 9,000 Subway stores by the end of this year, and will move into more of the sandwich shops next year, CEO Howard Schultz told analysts during a conference call about its quarterly results Thursday.
"Candidly, given the fact that fast-food players have gone after the breakfast business - specifically McDonald's - in such a big way, and made such big push into coffee, their core competitors want to compete directly with them in that space," Schultz said. "SBC is in the infant stages of what it could be domestically and internationally."
The company declined to give details, pending a press release early Friday morning. Subway said almost a year ago that it would test SBC brewed coffee in about 1,900 locations.
Starbucks has long recoiled at the thought of being a fast-food player itself. Schultz said in his 1997 book, "Pour Your Heart Into It," that he was pained by comparisons to fast-food businesses.
The company stuck by that reasoning a few years ago, when McDonald's approached Starbucks about supplying coffee for its new espresso program.
"We passed because it simply was not a good brand fit, and we're confident that was the right decision," Starbucks spokeswoman Deb Trevino said earlier this year.
It hasn't always been as cautious with the Seattle's Best Coffee brand, which it bought in 2003. SBC supplied some McDonald's stores in the Pacific Northwest until a couple years ago, and it has traditional franchises that Starbucks does not.
But there's a difference between being in some fast-food stores in the region and partnering nationally with a company that will soon pass McDonald's in total locations worldwide (about 32,000).
"It's certainly a change in attitude from what they've said in the past," said R.J. Hottovy, a restaurant analyst who follows Starbucks for the research firm Morningstar. "McDonald's probably would have been a stronger partner, given that they still have some company-owned locations, a stronger brand name and a better relationship with franchisees."
Still, it's a sign of progress that Starbucks is realizing what it has with SBC, he said. "It's a way of expanding in the U.S. without diluting the Starbucks brand, and Subway is probably just as excited to have a relatively well-known brand name partnering with them as well."
More information on the jump about Starbucks' earnings, including CFO Troy Alstead talking about when it will decide what to do with its $600 million pile of cash.
Investors sent Starbucks shares up quickly after it posted a fourth-quarter profit of $150 million, or 20 cents a share, better than analysts had expected and a vast improvement from its $5.4 million profit during the fourth quarter last year.
Sales dropped 4 percent to $2.4 billion, but the company more than made up for it with $580 million in annualized cost cuts --$30 million better than it had promised Wall Street. For the quarter, operating expenses were down 11 percent to $2.3 billion.
Starbucks also saw its seventh consecutive quarter of same-store sales declines, but the 1 percent drop was the least severe in all those quarters--and better than the 3 percent decline that many analysts expected. It's an improvement from the 5 percent drop last quarter and the 7 percent decline during the fourth quarter a year ago.
After a fiscal year in which it closed more stores than it opened - bringing its worldwide total to 16, 635 - Starbucks plans to slowly start growing again. It expects to add 100 stores in the U.S. and 200 stores internationally in the coming year.
On the call Thursday, Schultz was particularly excited about the company's prospects in China, which he said will someday be its biggest foreign market. Currently, its biggest international markets are Canada and the U.K.
On a recent visit to China, Schultz said, he was reminded of Starbucks' early growth in the U.S. "The China market, which now has nearly 700 stores, holds the potential for thousands," he said.
During the quarter, Starbucks took $53 million in restructuring charges, compared with $99 million in the fourth quarter last year. Without the charges, it would have earned 24 cents a share, better than the 21 cents that analysts expected, according to Thomson Reuters.
Its overhead was up 38 percent to $133 million because of higher performance-based compensation, Chief Financial Officer Troy Alstead said during the call with analysts.
Starbucks expects its Via instant coffee, which recently rolled out in the U.S. and Canada, to be "profit neutral" for fiscal 2010, because of up-front investments in selling the product outside Starbucks stores, Alstead said. Via recently became available in Costco and Target stores.
In answer to a question from the analyst community, which is always eager to know when a company flush with cash will start paying a dividend, Alstead said Starbucks will wait until after its current holiday quarter to make any decisions about how to use excess cash.
When its fiscal year ended Sept. 27, Starbucks had $599.8 million in cash, more than double the $269.8 million a year earlier.
For the year, it earned $390.8 million, up 24 percent from the previous year, on net revenues that fell 6 percent to $9.8 billion.
Investors applauded the results, sending shares up quickly after Thursday's earnings announcement, which came after the close of regular trading. Shares gained 49 cents to $19.70 in regular trading, and another 73 cents to $20.43 in after-hours trading.
Starbucks stock has traded between $7.06 and $21.11 over the past year, down from highs approaching $40 in 2006.
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