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Cost-cutting, increased margins and improved, although still negative, same-store sales helped Starbucks Corp. swing to a profit in its third quarter from a year-ago loss. The results were met kindly by securities analysts and investors, as the company’s stock rose 19 percent for the week of July 20.
“The transformation of Starbucks is well underway,” said Howard Schultz, chairman, president and chief executive of the 16,729-unit operator and licensor, during a conference call with investors July 21.
Schultz, who has been working to turn around the beleaguered brand since he returned to the helm last year, has closed underperforming stores and revamped the chain’s food, service and pricing to combat sinking traffic trends. Starbucks also is up against stiffer competition from McDonald’s and its new McCafé line of espresso-based drinks, as well as growing beverage and food offerings from the likes of Dunkin’ Donuts and Panera Bread.
For the quarter ended June 28, Starbucks earned $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 primarily from the closures or planned closures of 900 locations.
Third-quarter revenue fell 6.6 percent to $2.4 billion. Global same-store sales fell 5 percent. In the United States, where there are 11,266 units, revenue fell 6.5 percent to $1.82 billion and same-store sales fell 6 percent.
The decline in U.S. same-store sales was an improvement over the 8-percent drop in same-store sales during the second quarter. Officials also noted that sales trends had improved toward the end of the third quarter, which bodes well for the rest of the year.
“A lot of hard work lies ahead,” Schultz said. “One quarter does not make a trend.”
Sharon Zackfia -- William Blair & Co.
Zackfia said Starbucks “defied expectations” in its latest quarter and called it the company’s “most solid all-around quarter since calendar 2007.” She noted that the coffee chain was able to garner traction despite McDonald’s McCafé introduction and the related advertising campaign that began in May.
“The third quarter is likely to prove a very important psychological turning point on Starbucks’ shares,” Zackfia said in a research note, “as rampant concern over competition is likely to be at least somewhat silenced. Moreover, with sales and margins improving, the pathway has become much clearer to regaining eventual earnings power.”
Larry Miller -- RBC Capital Markets Corp.
Miller noted that Starbucks’ introductions of its instant coffee VIA in Seattle, Chicago and London successfully met corporate sales and volume targets. He said Starbucks plans to debut VIA systemwide, along with a marketing campaign, in the fall of this year, or the company’s first quarter of its fiscal 2010.
He did note, however, that while there were many positives to the Starbucks story in its latest quarter, the chain still has an uphill climb ahead of it.
“Less bad same-store sales, easier sales comparisons, and strong free cash flow are clearly positives in the Starbucks story,” he said in a note. “We’re … concerned about Starbucks’ ability to sustain improved same-store sales given the high levels of competitive discounting and its lack of pricing power.”
John Ivankoe -- J.P. Morgan Securities Inc.
Ivankoe said Starbucks’ latest quarter dispelled at least two fears that investors carried, namely that corporate cost cutting would hurt customer service and that powerhouse McDonald’s would grab hold of a chunk of the coffee segment’s market share with its McCafé line.
To the contrary, Starbucks reported that qualitative perception rankings from consumers improved as the chain worked on operating efficiencies and that McDonald’s advertising efforts only seemed to elevate coffee sales through the whole segment.
“We believe Starbucks’ overall brand value has been helped, not hurt, by a more QSR approach in combo pairings and price point advertising,” Ivankoe said, “and, importantly, its premium positioning and overall experience has been protected.”
Joe Buckley -- Bank of America-Merrill Lynch
Buckley noted that cost cutting at Starbucks, mainly from the closure of stores, was the star of this quarter’s earnings report.
“The quarter was a solid, cost-based beat with [Starbucks’] full-year cost savings target raised from $500 million to $550 million,” he said in a research note.
Without the sales drivers, margins were helped in the latest quarter by reduced dairy costs, less waste and revised labor procedures, Starbucks said.
“It’s tough to say what goes from here,” Buckley said. “Third-quarter sales performance was reassuring, but Starbucks remains a discretionary purchase with much competition. … It’s unclear when sales [will] truly improve and unclear what growth potential there may be for the brand.”
Lisa Jennings contributed to this report.
Contact Sarah Lockyer at [email protected].