Starbucks CEO’s optimistic outlook counters analyst anxiety over sales

Starbucks CEO’s optimistic outlook counters analyst anxiety over sales

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SEATTLE Starbucks Corp. [3] said it had bottomed out and will report per-share earnings growth in its current fiscal year 2009. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Many observers aren’t so sure. Calling Starbucks a “show-me story,” one analyst wasn’t certain that consumers would revisit the chain during this economic crisis, even with new loyalty programs and holiday offerings in place. Another analyst said that even if the company could pull off per-share earnings gains on still-negative same-store sales trends, that type of growth is not sustainable. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

(To view charts featured in this week's print issue, click here.) [4] —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Still, Howard Schultz, Starbucks’ chairman and chief executive, said during a conference call with investors earlier this month that he holds a “renewed sense of optimism.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“We have re-architected our cost structure, which will allow for operating-margin expansion,” he said. “We have a significantly healthier portfolio focused on geographies and locations with the best opportunity for growth. We are taking steps on value and loyalty to reward customers, which is clearly a critical area in this difficult economy.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

He added that October sales trends showed no signs of deterioration from the chain’s September-ended fourth-quarter dip of 8 percent at locations in the United States, an indicator of a “bottoming-out milestone” for the brand. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

For the quarter ended Sept. 28, Starbucks reported net income of $5.4 million, or 1 cent per share, compared with $158.5 million, or 21 cents per share, a year ago. Costs associated with the company’s unit closures and other restructuring efforts hurt earnings by about 9 cents per share, Starbucks said. Revenues increased 3 percent to $2.5 billion. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Joe Buckley Banc of America Securities LLC —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“Starbucks seemed pleased that October comps did not weaken further,” Buckley said in a research note, “but we think the message was that comps are still down high-single digits.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

He added that while Starbucks’ coffee give-away on Election Day drove significant traffic, “free promotions cannot be a cornerstone of a turnaround plan.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Buckley said the company’s fourth-quarter results were disappointing and that cost cutting and restructuring, while necessary moves for Starbucks, would not be enough to turn around the chain’s negative trajectory. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“We continue to think that the primary issue for Starbucks is the economy given the broad demographic expansion of its customer base,” Buckley said. “We also note that competition is likely to be a growing issue given McDonald’s [5] 2009 specialty coffee plans.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Sharon Zackfia William Blair & Co. LLC —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

More bullish on Starbucks’ future, Zackfia told clients in a research note that it is time for investors to ask what’s next for the coffeehouse brand. The current macroeconomic situation is already built into the majority of retail and restaurant stock prices, she said, and same-store sales may have bottomed out already. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“At a minimum, we note that management’s early and decisive actions position Starbucks better than the vast majority of retail or restaurant names to achieve [earnings-per-share] growth in a variety of macroeconomic scenarios in fiscal 2009,” she said. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Starbucks has predicted various levels of earnings growth for the year ahead, even on same-store sales as negative as 7 percent, mostly because of the benefits of store closures and a reduced corporate head count. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

John Glass Morgan Stanley & Co. Inc. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Glass is not so certain that Starbucks’ earnings growth on negative same-store sales is something the company can, or should, sustain. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“This sounds to us like a one-year remedy,” he said, “as negative sales rarely yield actual margin expansion in and of themselves. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“We think a turnaround will take more time than most observers appreciate. Near-term challenges include margin pressures from turnaround initiatives, increased price sensitivity, store closure charges, macro headwinds and competition.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Larry Miller RBC Capital Markets —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Miller added to his research commentary that despite all of Starbucks’ woes, it would generate enough cash flow to pay down debt and remain in compliance with all lending covenants. Debt default has plagued the industry, as companies that hold significant leverage and suffer from slowed sales and higher costs find it more difficult to service debt loads. Starbucks holds about $550 million in long-term debt. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

“During 2009, management expects $1.3 billion in cash from operations,” Miller said. “The company also has the ability to borrow approximately $271 million currently from either the commercial-paper market or its credit facility. As such, management believes it’s a low probability that any debt covenants would be breached.” —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,

Standard & Poor’s Rating Services held its debt ratings on Starbucks despite the weak quarterly results, mainly because of the company’s plan for reduced spending and its strong cash flow. —After reporting fourth-quarter results that included heavy charges for its restructuring plan and a 97-percent drop in profit,