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By Lisa  Jennings

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SEATTLE (July  22, 2009) Cost-cutting, improved margins and better-than-expected same-store sales, although still negative, helped Starbucks Corp. swing to a profit in its third quarter — results analysts are calling the company’s most “solid all-around” performance since 2007.

“The transformation of Starbucks is well underway,” declared Howard Schultz, chairman, president and chief executive of the 16,729-unit chain, on Tuesday in a conference call with analysts. 

Schultz has been working to turn around the beleaguered brand since he returned to the helm last year, executing a comprehensive “transformation agenda” that included the closure of underperforming stores and layoffs, as well as a revamp of the chain’s food, service and pricing to combat sinking traffic trends.  

Despite the largely positive results for the June 28-ended quarter, however, Schultz said no one at Starbucks is “doing victory laps” just yet.

“A lot of hard work lies ahead,” said Schultz. “One quarter does not make a trend.”

Starbucks reported net income for the quarter of $151.5 million, or 20 cents per share, versus a net loss of $6.7 million, or 1 cent per share, in the same quarter a year ago. Latest-quarter total operating expenses fell about 15 percent, mainly from reduced restructuring charges that totaled $51.6 million versus $167.7 million in the year-ago quarter.

Those charges stemmed from the closures or planned closures of 800 corporate stores in the United States, the restructuring of the company’s business in Australia, and the closures of an additional 100 corporate locations in international markets. 

At the end of the quarter, 676 of the designated domestic stores had closed, as well as 89 international units. The remaining planned U.S. closures will be complete by the end of the fiscal year, Schultz said. 

The company cut $175 million in expenses during the quarter and officials said they expect to see $550 million in savings by the end of the year, far exceeding its $500 million cost-cutting target.

Third-quarter total revenue fell 6.6 percent to $2.40 billion, which the company blamed on a 5-percent decline in global same-store sales.

By Lisa  Jennings

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In the United States, where there are 11,266 Starbucks Coffee locations, total third-quarter revenue fell 6.5 percent to $1.82 billion. Domestic same-store sales fell 6 percent, and reflected a 4-percent decline in the number of transactions and a 2-percent decrease in the average value per transaction, the company reported.

The domestic same-store sales decline, however, was an improvement over the 8-percent drop in same-store sales in the second quarter this year. Officials noted that sales trends improved toward the end of the third quarter, which bodes well for the rest of the year.

Analysts have spent much of this year fretting about the potentially negative competitive impact of McDonald’s gourmet coffee rollout — and its corresponding multi-million dollar advertising campaign.

Schultz, however, said the “extraordinary advertising dollars” spent by competitors have helped build unprecedented media awareness about coffee, and the result for Starbucks has been positive.

Sharon Zackfia, an analyst with William Blair & Co. in Chicago, said the company’s third-quarter results would likely prove a “very important psychological turning point for Starbucks’ shares, as rampant concern over competition is likely to be at least somewhat silenced.”

Starbucks’ own marketing efforts have been working, Schultz said.

The coffeehouse giant has made great strides in “customer engagement,” whether through value-priced breakfast pairings, improved food offerings or making better coffee.

“Our research shows that we’re making real progress on every measure of customer satisfaction,” said Schultz.

Starbucks has become a leader in its use of social marketing. Last week the chain became the most popular brand page on Facebook, with 3.5 million fans, for example.

During the third quarter, the company announced the opening of three new-prototype units with an environmentally friendly design in Seattle, Paris and Tokyo.

In addition, the company this week is opening the first of three community-focused coffeehouses that will not be called “Starbucks,” but instead will be named for the neighborhood where they are located. The first, called 15^th Avenue Coffee & Tea Inspired by Starbucks, in Seattle will include a three-daypart menu that will add beer and wine to the beverage lineup.

Sarah E. Lockyer contributed to this report.

Contact Lisa Jennings at ljenning@nrn.com