After reporting record results for the fourth quarter and full year, Starbucks executives told analysts Thursday that the once-beleaguered coffeehouse chain is now “firing on all cylinders.”
The Seattle-based company reported an 86-percent increase in net income for the Oct. 3-ended fourth quarter, saying its earnings per share and consolidated margins were the highest in company history. Click here for full results.
In a conference call with analysts following the report, Starbucks chairman, president and chief executive Howard Schultz outlined the milestone year’s performance as a platform for future business growth.
When asked by analysts whether the company might consider a strategic acquisition as a means of deploying the $1.6 billion in cash available at the end of the year, Schultz offered a careful “maybe” — saying he hoped his response would not cause an overreaction.
The company has deployed capital in offering dividends and share repurchases, he said, and it and will continue to invest in the business, including the continued development of VIA and secondary Seattle’s Best Coffee brand.
However, Schultz added, “I do feel the future of the company over time will not only be limited to organic growth. … If opportunities avail themselves, we will take advantage.”
Other highlights from the call with analysts:
• Schultz and the other executives deflected questions from analysts about the company’s decision to end its 12-year relationship with Kraft Foods as distributor of Starbucks packaged coffee to grocery stores and other outlets. Before the earnings call on Thursday, Starbucks said the distribution agreement would be coming to an end, thought it would not elaborate on the timing or details of the transition.
Following that announcement, Kraft Foods on Thursday issued a statement saying its agreement with Starbucks was “perpetual.”
“Importantly, if Starbucks decides to exit its relationship with Kraft Foods, the agreement requires Starbucks to pay Kraft Foods the fair market value of the business plus, in certain instances, a premium,” Kraft said in its statement.
Starbucks countered with another announcement, saying: “We consider it unfortunate that Kraft has chosen to make public statements that we believe mischaracterize the nature of the agreement between our companies, including the term of the agreement. It has been, and continues to be, our intention to keep these conversations private. There is a specific mechanism within the agreement for the resolution of disputes. As we said in our earnings call, we will ensure that our mutual customers remain well-served.”
• Schultz said sales of the company’s new VIA Ready Brew instant coffee continued to accelerate in the fourth quarter, reaching 55,000 distribution points worldwide, with more to come.
In its first year, the new product reached global sales of $135 million, he said, “making it a runaway product success by any objective measure.”
Starbucks officials said the company plans to continue to build on the VIA platform as well as introduce other new products and channels in its coffeehouses that could migrate to packaged goods in the same way.
• International growth will continue, and Schultz highlighted opportunity in Brazil, where the company bought back operations this year, as well as the new market of India.
When asked whether the company is moving more toward company-operated markets overseas — Starbucks has also repurchased operations in France and Beijing in recent years — Schultz said it depended on the market.
In Brazil, for example, the former licensing partner did not have the capital to grow, but Starbucks saw a “runway” of growth opportunity there that it wanted to tap, so it took over operations. In other markets, it may make more sense to work with a local partner, he said.
In 2011, Starbucks plans to open 400 new stores internationally, most of which will be licensed, and 100 new stores in the United States.
• Starbucks said 1,000 stores were refurbished in 2010 and about the same number will see remodels across the U.S. in 2011.
The company is still evaluating new prototype stores, such as the flagship Olive Way location in Seattle, which has started offering beer and wine and a broader menu with the goal of building afternoon and evening sales.
Results from Olive Way are not yet available, the executives said, but consumer feedback has been positive.
• Schultz said green coffee prices have increased more than 50 percent over the past nine months, largely because of speculation, not market forces. “We don’t believe this is sustainable,” he said.
A pending oversupply will likely bring coffee prices down eventually, but the company was forced to lock into higher prices now, which it said would likely hurt earnings next year by 8 cents to 10 cents per share.
Schultz said the company will continue its varied pricing structure. Last year, Starbucks raised prices on some more-labor-intensive beverages and lowered prices on other products.
“We’ll hold prices where we can,” Schultz said.
Contact Lisa Jennings at [email protected].
