Starbucks' second-quarter profit down 77%, store closing charges blamed

Starbucks reported fiscal second-quarter net income fell 77% to $25 million, or 3 cents a share, due to charges to close stores. A year ago, Starbucks earned $108.7 million, or 15 cents a share. Sales fell to $2.3 billion from $2.5 billion. Excluding charges, Starbucks said it made 16 cents a share. Analysts had expected Starbucks to earn 16 cents a share on sales of $2.38 billion. || Read "Starbucks profit down 77%, hurt by charges" || Read Starbucks' release

Comments

[WestCoastArtist]

So... stop closing the stores?

[quityerbitchin]

One time costs now are better than a slow bleed with no end in sight

[g]

quityerbitchin:
I completely agree. There are way too many stores in operation right now.

In fact, this is what they get for opening so many stores so fast.

[Melody]

"As a percent of total revenues, cost of sales including occupancy costs increased to 42.3 percent during the second quarter of fiscal 2009, ... and higher beverage costs as a result of new product innovations..."

^ That's from the press release, but Troy Alstead live during conf call just now almost said the exact same thing specifically mentioning tea lattes and Vivanno. So basically, during declining same store sales, and in a recession, Starbucks launched beverages that were particularly expensive to make? ??? Am I understanding that right.

[anon]

Melody -

I think you are understanding it correctly - plus they may be factoring in costs of the new mastrenas, clovers, etc. as part of the beverage making costs. It's also interesting to see that in recent months they revamped the Vivanno recipe and are now using less protein powder mix - less waste, but also much less cost.

[Melody - Random conf call stuff]

Does anyone know what this "streamlining the menu" means in plain English? Some drastic change on what the menu has on it?
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I'm listening to Troy Alstead talking about "increase food attach".
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"Vivanno is the beginning of a healthy alternative" - "you'll see more things from us in regard to Vivanno this summer"
^ Howard Schultz - So Vivanno is expanding? More flavors? (I enjoyed Vivanno but liked it a lot more with the old recipe that wasn't so thick!).
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Only 1/4 of the big $500 million cost savings that Troy Alstead talks about comes from in store savings. I'd assume that the majority comes from labor, for that 25%.
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Wow there are about 700,000 Gold Card members right now! Adding about 1000 new Gold Cards a day. Sounds like a lot to me.
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Somehow this quarterly conf call seems especially dull.
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Cliff Burrows talking about LEAN. "We're well on the way to evolving that". "We are very pleased with the progress and that is indeed underpinning the labor savings Troy said earlier".
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Health & wellness: Howard won't get into specifics. "We believe we have a unique opportunity to build that category consistent with what we've done already ..." "Most Americans are unaware ... coffee provides them with the largest (??) antioxidants" (Melody comment: of course google the difference between filter and non-filtered coffee for health differences).
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"We continue to evaluate Sorbetto."
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[energybolt]

Our sweat & tears equals this? Here we go again! Back to the trenches.

[usorthem3]

ok the company PROFIT fell, however this still leaves a 23% gain. $.16 gain on shares. i think the board needs to scale down the brand a touch because the fingers are moving in so many directions that the momentum alone will carry sbux down a hill in a heartbeat. the company seems to be holding its own right now so STOP ALL NEW PROMOTIONS. in the culinary field when creating plate presentations i was always taught less is more. let the product out shine any extras. is it just that board had let it out of control and they can't get a hold of it? sustainablity is the key to survival not growth. the world has got to learn that in order for the planet to survive with us living here. back to profit, there still was a little and stock is twice where it got down to. if i were gamlbing i would say "let it ride" & see what happens.

melody- if i get to seattle i would love to buy you a cup of clover brew. i bet it rock with biscotti.

[SBUX Alum Bill]

Here's a nice summary from the Seattle Times:

Seattle Times Article

[Lisa Suender]

Yes, closing stores is expensive and the numbers will continue to sour as more so called" underperforming /non drive-thru" stores are closed and new ones(new markets/sbc) are opened. The sad thing is many wonderful neighborhood stores are being closed with little fight from their communities(not ours of course,in Ripon Ca, GO RIPON!)and the loyal customers have no choice but to spend more money they don't have on gas to travel to other Starbucks stores that used to be their favorite "Third Place". The partners that were connected to their customers are being transferred to other locations where they probably don't live and have no connection to their new home or their customers.

Yes,Starbucks expanded too heavily in many markets and yes, there are too many in stores in large metro areas that closing a few won't be missed.

It's the ones that are being closed in places where they are nestled in small downtowns, where customers get out of their cars, engage with the staff and vice versa, socialize with family and friends and have an experience.

Those stores are being closed to keep drive-thrus open for the get-in and get out- here's your coffee, thank-you very much. Loyal customers have been tolerant through many things that Starbucks has explored and ventured into but right now one has to ask, does Starbucks really want to see me or would it rather I just drive on thru.

What is the ideal Starbucks customer today?

[A Customer]

For those questioning store closures and seem to appear to struggle with this concept here is a suggestion: Look at the store's P&L (I am hoping store managers know how to read it). What is your bottom line does it have a - in front of the number or ( ) around the number? Now look at it YTD. That should answer all the whys.

Now for customers trying to "Save Our Store" bottom line, decision has been made maybe you should have spent more or frequented the store more often. Sales and utimately profits drive the decision. Last I checked Starbucks was not a non-profit.

[TNT]

Opening too many store, unsuccessful promotions, and dishonest labor practices are why SBUX is having troubles. It’s all about poor leadership and mismanagement.

This can't be news to anyone!

[sbuxnewbie]

It only stands to reason that there are fewer transactions when there are fewer stores.

The menu sreamlining is based on stores having a choice of certain products based on how many they sell. For instance, if you're a 7-day a week store, and sell 756 or fewer pastry items each week, you are a low-level store, and have to choose from the 30 best-selling pastries - a bogus listing, because all new pastries go to the top of the list. Sell 757 -1000 pastires, and your store is medium level, and gets to take on another 5 items. More than 1000 pastries a week and you get to sell all of the pastries.

(Keep in mind, too, that the frozen stores (Secondary and tertiary markets) can't sell the non-warming sandwiches and cold snack items anyway, because we don't get daily deliveries, and the stuff only has a 1-day shelf life.)

Luckily, we have the DM and RDO's blessing to atually order what sells, NOT what we are told sells - so we were able to skip some lousy sellers and add a few items back in, albeit at a low enough level that our markouts are still averaging about 2.4% of sales - a perfectly acceptable number.

As to the original 600 stores on the closing list, there are several still open because they are making a profit each month, despite what the "expert" bean counters said last summer. No one seems to be able to tell many of these stores whether or not they are officially going to stay open, even when they are outperforming other stores in their respective districts, however.

[Lisa Suender]

For the naysayers that keep saying spend more to save stores, how about Starbucks spending time analyzing their individual stores, isn't that what DM's are for? Be open when there is traffic instead keeping the doors open and spending more monies on employee and operating costs when there is no business/traffic coming in for hours on end. Or neighboring businesses open as late? If not close earlier. Starbucks spent a great deal of money on leases back about 4-5 years ago when they could out bid any competitor and have been paying those inflated rents for years. Property owners would rather negotiate a lower rent then have see a dark closure, or worse yet a vacant building.

It's always easier to pass the buck or lack of onto the customer when it is the business owner who should be cutting costs(rent, hours, advertising, etc)- Perhaps if prices did not continue to go up,customers could visit more than 1x per day if at all. Making the customer pay for all of a companies shortfalls, is a geat way to go out of business-

[me]

Yay, we earned some money. Once again, I think this is pretty impressive these days!

[Will]

Where are the results from cutting labor to the bone? Aren't these the same kind of excuses that were made this quarter last year?

[Jim C]

There is too much waste in the entire system. The variance on loss (items stolen, misplaced, forgotten, lost in transit) is HUGE. A loaf cake baked and frozen in San Antonio, TX at HillBillyCountry, is sent to a distribution center, and then placed on a local delivery truck. There is loss in the supply chain from the "baker" to the store. It is HUGE, we are talking 30% of the cogs. Yes, there is going to be a streamlining of the menu. But, there should also be a streamlining of the executives. Goodbye, Howie. Goodbye, Columbus.

[SBUX Alum Bill]

Here's a post-earnings call review from the Seattle Times:

Starbucks to launch marketing camgaign while slowing store growth.

[(former) FLA SM]

"Property owners would rather negotiate a lower rent then have see a dark closure, or worse yet a vacant building."

Tell that to Simon Malls. If it were true, my old store would still be open. Instead, it has been sitting dark for seven weeks now, with all the equipment and fixtures still inside, gathering dust.

[dsxmachina]

Just an FYI to those like A Customer. Starbucks has closed MANY stores that were profitable, without apparent rhyme or reason. It seems that most of the stores that the "new store team" opened in the past three years were closed, profitable or not.

[Hard Opinion]

Reading between the lines of the conference call to analysts, the clear message that seem to come through was the increased push of VIA. Most people still seem to think of SBux as a "coffee shop" business.

Today's reality is that it is a supplier of coffee and related products through any distribution channel that is profitable. If it can make more money through selling Via to the likes of Costco, other food/beverage vendors through distributors like SYSCO and get low cost airlines like the UK's easyJet to use the product, then that is the way the company will go. This will apease stockholders and analysts alike. What will it do for the stores - very little. You can look forward to increasing "Lean" applications throughout the store system and subsequently more store closures.

This may be a wild shot - but - lookout for an increased drive towards Seattle's Best franchise stores opening. This model will enable SBux to sell product without the trouble of operating stores directly, that is the franchisee's problem, and a dream scenario for SBux.

If you think you're under pressure now, chances are there will be much more to come. The mid-band of management in most big organizations is usually the problem and SBux has a serious problem here. To protect their own inadequacies they are the buffer between what is real and what is believed by those at the top. They rein fire and chaos on those below, while blowing fresh sanitized white smoke up the rear ends of those above them adding to the delusion that "all is well" on the ground. Read Robert Townsends "the Peter Principle" - it explains perfectly how people rise to the level of their own incompetence! (For that read - DM/RD/RVP!)They're all too busy getting caught up in the metrics that they forget the human side of management - the people on the ground.

One comment attached to the recent Seattle Times article eluded to HO gossip about the prospect of the company being taken over in a few years. Not so far fetched. On current performance and share value, SBux could be in the sights of any corporate predator who views profits in asset stripping and cash producing products like VIA. Impossible! It happened to Folgers! As stated earlier, if SBux is starting to position its self more as a product purveyor then anything is possible. Stockholders will not think twice about voting for any deal that gives them profits - including the Board.

Add to this the seemingly increasing levels of litigation about labor violations and you can then start to see that shifting the operating model starts to have its attractions, dump the labor issues onto franchisees and focus on sell coffee products through any channel available! What this space!

[adam]

For the longest time the company raised prices and lowered quality because they could get away with it. Now they are in the strange position of having to fight for customers. Is selectively lowering prices and bringing in some factory food the solution? Personally, I feel ALL their drinks are overpriced for what you get. Quality on the base espresso drinks is hideous. Those prices need to be cut but I'm not sure Schultz realizes this. I used to get americanos for a buck sixty something and now it's over two dollars and the quality has gone down the drain. I no longer buy them, ever.

[Stan999]

Starbucks is no longer viewed by investors as one of the favored growth stocks. While their stock may go up it will never return to the P/E ratio it enjoyed in the past.

[Sneaky]

@Lisa Suender

I hope I can add a little clarity around the decision to close a store. A lot of work is done prior to this decision being made:

Open/Close times - The DM's receive a report every month that shows # of transactions and $ sales by 1/2 hour. If the store has opportunity (more than 6 trans in the last 1/2 hour) the hours are extended. If not (less than 5 trans in last 1/2 hour) the hours are reduced. Every effert is made to adjust the store hours appropriately to positively affect business and labor before a closing is decided on. However, often our leases restrict our ability to reduce the hours enough.

Labor during slow mid-day periods - The stores all use a highly complicated and complex labor scheduling system that is based on 6 weeks worth of history on # of transactions and actual product sold. If the store has no business during the day the system will absolutely cut the available hours for that store. But it won't reduce it below 2 people for theft reasons (yes, employees do steal). And it is more expensive to close then re-open.

Negotiating leases - It's been done, over and over again. This is absolutely the 1st thing that is done. If the landlord was willing it would have happened already. The company is pretty aggressive in the 1st place and won't pay a premium as you suggested. A Pro Forma is done on each location (a profitability analysis prior to opening). If a lease is much too expensive in the beginning the store would not be approved for opening). Then leases are reviewed annually for opportunity.

Advertising - The stores are charged by coporate for a percentage of the overall advertising and promotion expenditures. This isn't something can be changed by the store or the DM or anyone in the field. The costs are quite minimal. The #1 cost of doing busines for any Starbucks is labor (pay, benefits, insurance, etc.). It is ridiculously expensive to ddo business in California due to the high misc labor costs imposed by the state. and pay rates are determined by corporate and can't be adjusted.

At the end of the day your local store has been through all these reviews, I am completely positive about that. Every possibility has already been addressed. I am sure that even with all that has been done it is just not possible to run a business that doesn't make money.

Ask the Store Manager to review the P&L with you. I am sure he/she will gladly do it based on your passion to keep it open (set confidentiality aside in this critical moment). They will explain every line. You will see the impossibility of the situation.

Good luck. It is very sad but unfortunately a reality.

[Latteguzler]

Stock's up big today. I guess investors believe the lies again. It’s getting time to look at shorting the stock.

[Store Display Gal]

I would like to think I would have a shot at getting some of those fixtures for my house but I am sure they would just use them at another Starbucks.

[Chanel Bags]

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[Retro Jordans]

Great comments all around. I like how there are a variety voices coming through.