Business

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Bad News Continues for Starbucks

November 11, 2008 12:58 PM
by Anne Szustek
Despite recent company moves to improve the coffee chain’s appeal and profitability, Starbucks posted year-on-year fiscal fourth-quarter losses at its U.S. stores.

Starbucks Sales Could Use Perking Up

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On Monday Starbucks reported a year-on-year drop in fiscal fourth-quarter 2008 earnings of 8 percent at its U.S. stores. The company posted flat sales at its overseas locations. The coffee chain also posted lower earnings per share than projected by investment analysts: 10 cents, rather than Wall Street’s estimate of 13 cents.

“Fourth-quarter net income fell 96 percent to $5.4 million, or 1 cent a share, in the three months through Sept. 28, from $158.5 million, or 21 cents, a year earlier,” reported Bloomberg, citing a Starbucks company statement.

Tighter household budgets have likely cut into sales at the gourmet coffee chain. “The economy is not cooperating,” Sanders Financial Management CEO Emily Sanders said in a Bloomberg interview on Monday. Starbucks is “fighting an uphill battle.”

Some are still upbeat on Starbucks’ long-term prospects, however, arguing that Starbucks’ recent business strategies have not had enough time to bear fruit.

On July 1, Starbucks announced the closure of 600 stores in the U.S. market. So far, only 205 of those locations have been shuttered.

In addition, the 48 percent year-on-year slump in Starbucks shares from March 2006 to March 2007 prompted Schultz to go on a campaign to combat the chain’s negative media and connotations.

Earlier this year, Starbucks reintroduced the mermaid logo that was designed at the company’s inception in 1971 on its cups and sleeves. Modeled after a mermaid found on an Old Norse woodcut, company founder and recently reinstated CEO Howard Schultz thought that the temporary switch was to recall warm memories associated with the brand.

Rob Giampetro of New York-based design firm Giampetro and Smith likens Starbucks’ 1970s throwback to those of Major League Baseball teams who offer affordable ticket packages so families can afford to attend games. “Now that Howard Schultz is back at the helm, this is definitely a nostalgia effort and a strong push to get back to the core values of the company,” says Giampetro.

In late March the chain installed new, smaller coffee machines to make it easier for baristas to interact with customers. Other initiatives planned for 2008 included customer loyalty cards and free refills for brewed coffee.

Matthew DiFrisco, an analyst with Oppenheimer & Co., told the Associated Press that “We expect Starbucks’ remaining U.S. stores to capture roughly 30 percent of the sales from the closed stores and thus boost same-store sales by roughly 1.5 percent.” But despite rolling out new items and taking steps to improve its customer appeal, “there does not appear to be a silver bullet to reviving same-store sales,” he said.

DiFrisco also pointed to October’s same-store sales dropping less than they did during the fiscal fourth quarter, something Schultz suggests bodes well for the coffee enterprise. If Starbucks’ same-store results for fiscal year 2009 are similar as to those for October 2008, the company would be poised to earn 20 percent per share. If same-store sales decrease by 7 percent, Starbucks’ profit growth would be flat.

“That in itself is a very big conclusion for us to be able to share because of the work we've done in 2008,” Schultz told Bloomberg.

Background: Starbucks introduces new, customer-friendly features

Key Player: Howard Schultz

Related Topic: ‘Mom ‘n’ Pop Coffee Stores Take On Starbucks’

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