Starbucks' 4Q Profit Down

You know if it’s about coffee I need to report on it so. . .

Starbucks' 4Q Profit Down 97%, Same-Store Sales Drop 8%

But CEO Schultz Believes Struggling Coffee Giant Has Hit Its 'Bottoming-out Milestone'

Restructuring costs have taken a bite out of Starbucks' fiscal fourth-quarter and full-year profits, the retailer reported today. Fourth-quarter earnings plummeted 97%, to $5 million, from $159 million in the year-ago period. The figure includes a $105 million charge for restructuring, and other costs associated with the company's turnaround plan. Full-year earnings also fell, 53%, to $316 million, from $673 million last year.

U.S. same-store sales also plummeted, down 8% from fourth-quarter 2007. The company cited decreased store traffic, as well as lower average customer check prices, thanks in part to a reduction in merchandise and in-store music sales.

"Nobody wants to go through something like this," CEO Howard Schultz conceded. "But we are a much stronger company for having gone through this." Mr. Schultz added that given everything the organization has learned in the last year, "We think we are in a better position to win today than we were a year ago."

Starbucks began to attempt a tricky turnaround in January, when Mr. Schultz retook the flagging company's reins. Since then, Starbucks has become a more visible marketer with mass sampling efforts and prominent newspaper advertising. The company has also shuttered stores across the country and slashed positions at its Seattle headquarters. But same-store sales have continued to slip, and competition from lower-priced competitors has gotten fiercer.

During the call, he stressed that the company has focused on ways of delivering value to consumers without devaluing the brand. Some of those initiatives include a gift-card promotion at Costco, in which the cards are discounted from face value, and a "gold card" launched nationally last week. Cardholders, who will pay $25 per year, will get 10% discounts on purchases, free WiFi and a variety special offers. In the first week, he said the product had surpassed expectations fivefold.

Mr. Schultz chose to compare his same-store sales with those of premium retailers such as Nordstrom and Saks Fifth Avenue, which have reported double-digit declines in comparable store sales. Other fast food companies, however, have recently reported strong same-store sales; McDonald's, for instance, reported third-quarter same-store sales were up nearly 5%.

Pre-empting the comparison, Mr. Schultz said Starbucks does not compete with fast feeders, and that its customer base is not the same. He added that he is even more confident in this assessment after putting value-focused measures in place, including those mentioned above.

Mr. Schultz also said that "signs of improving comps have appeared episodically"; that October same-store sales have not continued to deteriorate; and that the most recent quarter may prove to have been the "bottoming-out milestone."

After touting his company's ability to garner media impressions with events such as its Election Day giveaway, Mr. Schultz was asked if Starbucks might consider boosting its ad spending. While he said the company would continue to be careful about which opportunities it seizes, Starbucks will look for more one-time tactics to deliver similar results.

"We have not been a traditional spender of classic marketing and 'consumer-facing activities' that have been associated with most consumer brands," he said, adding that with the Election Day promotion, the company was able to buy one TV spot and then leverage digital media, PR and word of mouth to significantly boost traffic and buzz around the brand.

Mr. Schultz gave scant details of an upcoming "Black Friday" promotion, which refers to the unofficial start of the holiday shopping season, the day after Thanksgiving, involving the chain's partnership with Product Red and its founder, U2 frontman Bono.

Larson note: When Starbucks started move this they were not getting whacked in the side of the head buy Dunkin’ Donuts and McDonalds and their marketing snipes at the higher and the lower end. Personally I use Starbucks as an office to meet clients at. I like the atmosphere much better than a counter at Dunkin’ Donuts or a booth at McDonald’s but to each there own. Mmmm do I hear Caribou?

Howard Larson
Larson & Associates
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