Archive for August, 2008

Starbucks CEO confident about turnaround

August 1, 2008 · Filed under Weblogs

SEATTLE — 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, but succumbing to competition from coffee-brewing rivals is not
one of them.

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"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."

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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."

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

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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.

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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.

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

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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.

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

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

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

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In
explaining the challenges, Schultz on Wednesday blamed the troubled
economy more than he has in the past. All along, he 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.

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

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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.

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"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."

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

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But business is strong in Mexico, the Middle East, Brazil, Argentina, the Philippines, China and Russia, Schultz said.

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"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.

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

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He
wants to do more with the Starbucks Card, which is used by one in every
seven Starbucks customers. He said a million people have signed up in
the past few months since Starbucks added new benefits.

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"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.

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Analysts have written off the fiscal year, which ends Sept. 28, and are looking to the future.

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"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.

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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.

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"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."

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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.

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"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.

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

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"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."

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