Howard Schultz on the profitable quarter: "There's no victory lap going on at Starbucks"

"We have a lot of work to do," the CEO said in Tuesday's conference call. "I said in my comments that one [profitable] quarter does not make a trend. We realize how tough the environment is in terms of the economy. We realize that there are competitors out there that have a much bigger appetite and advertising muscle than we do, and so we’ve got to be very careful here to recognize that the headwind is still in front of us and it’s too early to think about 2011." Read "Starbucks Earnings Call Transcript"

Comments

[Quagmire]

"...and so we’ve got to be very careful here to recognize that the headwind is still in front of us and it’s too early to think about 2011."

I love headwinds Giggity, Giggity, Gooo!!!

[shot in the foot]

Wow! Stock price is up over 15%. I guess over working partners, cutting down on service and quality, and ripping off the customers was a good idea. At least for the short term...

[PoutyBarista]

Wow! Now its time for all of Howie's buddies to dump their stock before the rest of the world realizes that declining customer counts and declining sales are here to stay.

Hwie took care of who reallt mattered to him.

[Cordelia]

soon to be leaving starbucks for peet's. so sad, what a great company 10 yrs ago. I won't be missing the stupid 10 pumps white mocha extra carmel folks. RIP sbux, Oh how the mighty have fallen!

[UPDATE]

UPDATE 3-Starbucks shares soar, analysts raise price targets
Wed Jul 22, 2009 1:53pm EDT

* Shares hit their highest in more than a year

* Deutsche Bank ups rating to "hold"

July 22 (Reuters) - Starbucks Corp's (SBUX.O) shares shot
up as much as 19 percent to their highest in more than a year,
a day after the world's largest coffee chain posted
higher-than-expected quarterly earnings, prompting several
analysts to raise their price targets.
Deutsche Bank upgraded its rating on the shares to "hold"
from "sell," citing better cost management and a potential
bottoming of weak top-line trends.
Starbucks shares were trading up $2.79 at $17.48 Wednesday
afternoon on Nasdaq, after rising as high as $17.59, making
them the ninth-highest percentage gainer on Nasdaq.
Trading volume jumped to more than 58 million shares, or
nearly five times the 10-day moving average. The shares were
the third most active on Nasdaq.
Starbucks ground out an expectations-topping quarterly
profit on Tuesday as it began reaping rewards from slashing
costs and closing stores. [ID:nN21362287]
"Financial discipline and ability to stabilize earnings
have been better than expected, value initiatives have
improved, and historical focus on store-led growth is gone,"
Deutsche Bank analyst Marc Greenberg wrote in a note to
clients.
The analyst, however, said he continued to regard the
competitive threat to Starbucks from McDonald's Corp (MCD.N) as
onerous, and its core positioning in "affordable luxuries" as
vulnerable.
But Starbucks' ability to manage against these challenges
has been better than expected, Greenberg said, adding that a
new level of financial discipline -- regardless of competitive
pressures -- may enable better earnings visibility.
"In short, we continue to have concernsabout competition
and product positioning, but no longer regard the model as
fundamentallyflawed," wrote Greenberg, who raised his price
target on the stock to $14 from $9.
Analysts at RBC and Goldman Sachs said that Starbucks' 2010
earnings outlook seemed "conservative."
Starbucks expects earnings growth of 13 percent to 18
percent in 2010, excluding restructuring charges, which equates
to earnings of 84 to 89 cents per share, RBC Capital Markets
analyst Larry Miller said.
Miller said the outlook may be conservative given the
margin improvement expected at its U.S. and international
businesses.
"We believe this estimate bakes in potentially conservative
forecasts around sales and commodity costs and expect consensus
numbers to move near or above the high end of the range (our
estimate goes from 85 cents a share to 95 cents a share),"
Goldman Sachs wrote in a note to clients.
CONCERNS REMAIN
However, even as they praised Starbucks fiscal
third-quarter performance, analysts expressed concern about the
company's ability to sustain the moderating decline in sales at
stores open at least 13 months it saw in the quarter.
Given the high levels of competitive discounting and its
lack of pricing power, there is concern about Starbucks'
ability to sustain improved same store sales, RBC's Miller
said.
"We remain concerned that SSS (same store sales) trends
will remain pressured, particularly during the summer," UBS
wrote.
Goldman Sachs also said the brand was seeking to shift its
"aspirational image" with "value offerings," but questions
remained as management was short on specifics.
The following table lists the revised price targets on
Starbucks shares. --
BROKERAGE PRICE TARGET RATING
NEW OLD
----------------------------------------------------
UBS $16 $13 Neutral
RBC $16 $13 Sector Perform
JEFFERIES $16 $14 Hold
GOLDMAN SACHS $17 $13 Neutral
BARCLAYS $15 $11 Equal Weight
DEUTSCHE BANK $14 $9 Hold
(Reporting by Vidya Lakshmi and Mihir Dalal in Bangalore;
Editing by Himani Sarkar)

[Pat Nerr]

I knew they'd be back... You did it Starbies...

[Von]

I took a break from reading the comments on this site for awhile beacause the overwhelming negativity and ignorance of most of the comments was just not very palatable. It still seems like most of the comments are coming from very embittered individuals. Seriously, if you don't like the company you are working for, do everyone a favor, including yourself, and find a job/company/calling that you enjoy- and make room for the good people out there who really want to work for the company.

[Asher]

I'm guessing a good chunk of that $25mil over forecast came from ALS screwing stores into building overly-conservative schedules and coming in under labor variance week after week...

[Argentius]

Great to hear!

Now, then, will they shortly be returning things like 401k contributions, personal days, vacation time for average hourly employees, and other benefits they axed in their cost-cutting measures?

Will I get to smile and greet "partners" once again?

I'm really happy with a lot of the new-store murmurs I'm hearing from Starbies lately. They went from a great employer who fairly compensated for a demanding job, to a run-of-the-mill one.

Sure, they were still "market competitive," but the race to the bottom is not one I want to win.

Here's hoping. A little bit.

[Coffee Soldier]

It's so funny on this site how the negative stories gather so many comments so quickly but a more cheerful, maybe our hard work is paying off, story gatheres only a few.

Keep up the good work fellow Starbuckians!

[Georgia Latte]

Coffee Soldier - it just goes to show you the mind state of the typical Starbucks gossiper poster. Notice, I didn't say ALL, I just said typical. Q3 earnings report is a great sign for the company, and should be viewed as the results of all of our HARD WORK and dedication to the company. I for one, am proud to see that our efforts were not in vain.

[UPDATE]

With a jolt from Starbucks, Nasdaq scores 11th straight gain
4:25 PM, July 22, 2009

Modest selling in some blue-chip stocks today ended the Dow Jones industrial average's winning streak at seven sessions, but the Nasdaq composite stretched its streak to 11 straight gains -- the longest such spell since 1996.

Nasdaq got a lift from some of the usual technology suspects, including Apple Inc., which jumped $5.23, or 3.4%, to a 10-month high of $156.74 after its better-than-expected earnings report late Tuesday.

But Starbucks Corp. also gave Nasdaq a big boost. The java retailer’s shares soared $2.70, or 18.4%, to $17.39 -- the biggest one-day gain since the firm went public in 1992, according to Bloomberg News data -- after Starbucks said late Tuesday that cost-cutting helped fiscal third-quarter earnings beat analysts’ estimates.

The stock has more than doubled since falling to $7.17 last November -- when the deepening recession left investors wondering whether the nation would swear off Caramel Macchiatos forever.

Starbucks’ sales remain depressed: Same-store revenue was down 5% in the quarter ended June 28 from a year earlier. But that was an improvement from the 8% drop in the previous quarter.

Wall Street expects the company to resume profit growth in fiscal 2010 (beginning in October). Analysts’ mean estimate is for operating earnings of 88 cents a share next year, up from an estimated 75 cents in fiscal 2009.

At the current stock price of $17.39, the shares are priced at about 20 times the 2010 estimate, compared with an estimated 2010 price-to-earnings ratio of about 15 for the Standard & Poor’s 500 index.

What about the threat from McDonald’s Corp.’s new McCafe coffee drinks?

On a conference call with analysts late Tuesday, Starbucks Chairman Howard Schultz asserted that the company was helped -- not hurt -- by new coffee-marketing campaigns from McDonald’s and other rivals.

From Schultz:

"What I’m saying is that during the quarter, we experienced a level of unprecedented investments in advertising by a whole host of companies, really raising a level of awareness and trial into the category. And as a result of that ... coupled with our own message ... we benefited from that.

"And I think sometimes people forget that despite the 50-plus countries and the thousands of stores that we have, that we have less than 10% share of U.S. coffee consumption and less than 1% share of coffee consumption outside of North America. So the size of the prize is still very large for Starbucks, and the level of awareness that has been created has been a benefit to us."

-- Tom Petruno

[prime mover]

well, good job starbucks - all you had to do was fire your best and most loyal managers and replace them with cheaper labor. in my 'former' district, 5 managers were let go back to back in less than 3 months. of them, 3 MOQs and all of them with 7+ years of experience. one even had 13 years with the company and was 2 weeks away from taking her coffee break - TWO WEEKS!!! (they knew this and fired her anyhow).

when stock jumped today I cashed in all my SIP (which even with the gains I have lost over $5K from my initial investment). no more playing both sides: wanting the stock to improve while wishing howard and his cronies would suffer. now I can hate starbucks with no reservations.

just like any marriage that ends in divorce, it was great, for a while, but the last few years sucked and I'm glad to be out. F-off starbucks.

[UPDATE]

Is a Turnaround Brewing for Starbucks?

Founder Howard Schultz pledged to revive Starbucks to earlier glory. Recent results suggest he is on the right track, but some observers remain skeptical.

By Ben Steverman

Starbucks (SBUX) founder Howard Schultz returned to the job of chief executive at the beginning of 2008, just a month after the start of the most brutal recession in decades. That's hardly the ideal time to turn around a troubled company.

But the latest results from Starbucks, released July 21, are raising hopes that Schultz might be making progress.

Earnings for the coffeehouse chain beat Wall Street expectations, mostly due to cost-cutting, one of Schultz's key initiatives. Responding to complaints that Starbucks grew too fast, he put the brakes on the chain's growth and closed 676 U.S. stores. The firm has cut other costs, too, saving $370 million in the last nine months.

In response to complaints the company had lost touch with its original mission—providing customers with a pleasant environment and a tasty cup of coffee (rather than, say, selling CDs)—Schultz made a number of changes.

At least according to Starbucks' internal metrics, those changes are working. In the last six months, Schultz told analysts, the chain's measures of customer satisfaction have improved, including ratings of employee friendliness, beverage taste, and speed of service.

SAME-STORE SALES RESULTS IMPROVE
Starbucks also launched an advertising campaign last quarter, while experimenting with new ideas, including a new prototype store in Seattle and a line of instant coffee.

Starbucks' same-store sales still fell 5% last quarter compared to the year before, a sign of the economic distress facing its customers. But that's better than the 8% decline experienced the previous quarter.

Improving sales trends are welcome at a time when the economy remains mired in recession. In a July 21 note, Oppenheimer (OPY) analyst Matthew DiFrisco noted Starbucks' "sales momentum throughout the quarter bucks the trend being reported by the majority of restaurants."

All this news—profits, cost-cutting, and sales trends—sent Starbucks shares 18.4% higher on July 22.

Yet it would be premature to say Schultz has turned Starbucks around. Starbucks shares are still 14% below their price at the beginning of 2008.

"There's no victory lap going on at Starbucks here. We have a lot of work to do," Schultz said, adding, "One quarter does not make a trend."

MCDONALD'S, DUNKIN' DONUTS CHALLENGING
Indeed, there are plenty of reasons to worry Starbucks' comeback could be derailed.

"They are not out of the woods yet," says John Macaluso, president and chief executive of the Cornell Management Group and an expert on management in the restaurant industry.

One problem that remains is fierce competition from McDonald's (MCD) and Dunkin' Donuts, which are challenging Starbucks with their own high-quality, premium coffee drinks. But in the short term, that competitive challenge may have actually helped Starbucks. Rivals' advertising seemed to spur consumer interest in coffee and Starbucks in particular.

"It appears that the various marketing campaigns and all the media coverage of our coffee has created unprecedented awareness for the coffee category overall," Schultz said.

However, one quarter's results don't mean the competitive challenge has faded. In the long run, "it's inevitable that McDonald's and Dunkin' Donuts are going to take some of Starbucks' market away from them," says John Langston, an analyst at Hodges Capital Management.

CONCERNS ABOUT COST-CUTTING
Because revenue fell, improvements to Starbucks' profits were the result of cost-cutting. "What they've done so far is really just trim the fat," Langston says. "That's what needed to happen," he adds, but now the firm must actually grow sales, a tall order in a recession.

Macaluso worries Starbucks could be cutting costs too deeply, and ultimately could hurt the quality of products or the cleanliness of stores. "They have to be really careful how they cut costs," he says.

The true verdict on Schultz's improvements to Starbucks stores won't be clear until consumer confidence returns, Langston says.

Others disagree, seeing signs in Starbucks' results that consumers' mindsets have already started to shift.

Lately, Macaluso detects more willingness on consumers' part to spend on "affordable indulgences." That doesn't mean the economy has improved exactly, but, he says, "people are getting tired of depriving themselves."

"The consumer is not dead," says John Buckingham, chief investment officer of Al Frank Asset Management. "They're just rethinking how they spend their money."

LONG-TERM OUTLOOK UNCLEAR
But how long can Starbucks continue to benefit from an improvement in consumers' moods, absent a full-blown economic recovery?

Also, big questions remain about Starbucks' long-term growth prospects, the impact of competition, and the success of its international business, Morgan Stanley (MS) analyst John Glass noted.

"It looks like Schultz has reinvigorated the company," says Buckingham, whose firm owns shares. However, he admits the stock market may have overreacted to the chain's latest results.

Consumer stocks—including Starbucks—have already rallied strongly in the past few months on hopes of an economic recovery. Until that recovery actually arrives, Starbucks' future remains cloudy.

Steverman is a reporter for BusinessWeek's Investing channel.

[Diamond]

How about bringing Jones Soda back into the mix! I was in NYC this past week and was wishing Jones Soda was at a Starbucks! Where's my hipster soda anyways!!!

[customers notice the lack of labor]

so with the extra $50 million saved over forecast from cutting store labor to -3% VTI and having customers wait, does that mean sbux is going to be buying a new plane! cool for the suits :) we should have it painted like a big brown bean. can't you see the reports of this big brown thing flying overhead? film at 11

[Mowie-Howie-Wowie]

customers notice the lack of labor

Get a life-we should have painted you as a brown bean and stuck you in front of one of the stores to give away samples and pastries...ONWARD!

[Jones Soda Answer]

@ Diamond

Starbucks cools on Jones Soda
Pop to be kicked out to make room for food

By CRAIG HARRIS
P-I REPORTER

Jones Soda, which is moving into Qwest Field next month, is getting bumped out of Starbucks, the Seattle P-I has learned.

Starbucks Corp., which has sold Jones Soda since March 2004 at its U.S. stores and since 1999 in Western Canada, will discontinue selling the pop maker's root beer and sugar-free black cherry drinks by the end of June.

"They have been a very good partner, but we decided to move in a different direction," Brandon Borrman, a Starbucks spokesman, said Wednesday.

Borrman said Starbucks wants to use the space Jones Soda occupies in coolers to expand its cold-food offerings. He said the decision to move Jones Soda was made this spring, but he didn't have a precise date.

Starbucks will continue to sell Izze, a sparkling fruit juice that sat right next to the Jones Soda products in some stores.

PepsiCo. acquired Izze in September. The cola giant and Starbucks have had a joint venture called the North American Coffee Partnership since 1994, which sells bottled Frappuccinos. A former Pepsi executive is on the Starbucks board of directors.

Borrman declined to answer questions on the decision to keep Izze. Michelle Naughton, a Pepsi spokeswoman, said Izze has been offered at Starbucks for more than four years, and she referred all other questions to Starbucks.

The loss for Jones Soda comes as Chief Executive Peter van Stolk was boasting Monday that his company could play with big soda companies after his business knocked off Coca-Cola to win the pouring rights at Seahawks games at Qwest Field. That deal begins July 1.

Van Stolk declined to comment about the relationship between Starbucks and Pepsi, but he said he understood that Jones Soda was being moved out so the coffee company could have room for sandwiches and other food items in the coolers.

"They are looking at what they need to do," van Stolk said. "We are working with them and continue to be a big supporter of Starbucks, and we will support them in many ways."

Neither Starbucks nor Jones Soda could provide a precise number of how many Starbucks stores carried the specialty pop, except that the drinks were only in company-operated Starbucks locations.

According to Starbucks, as of April 1 the company had 6,281 company-owned stores and 3,533 licensed stores in the U.S. At that time, Starbucks also had 203 Canadian stores. Starbucks does not break down its foreign stores by geographic location.

Van Stolk predicted that the two Seattle-based companies would do business in the future.

"We have a relationship that we will work on building," van Stolk said. "We are good partners, and we will continue to be good partners with Starbucks."

Van Stolk said losing Starbucks would not severely affect Jones Soda's revenue. The company had $9.2 million in revenue and profit of $58,312 for the first quarter, ended March 31. Sales for the quarter, however, were well below Wall Street's expectations, and one analyst said the loss of Starbucks "is certainly not favorable."

"It's discouraging to see they are losing this distribution," said James Maher, a retail analyst with ThinkEquity Partners of San Francisco. "Starbucks is going to open at a 20 percent clip in the U.S. ... That has gone away. The whole thing (for Jones Soda) has been a growth story, and now we have a shrinking situation. That's the last thing anyone wants to see."

John Sicher, editor and publisher of trade publication Beverage Digest, said being nudged out of Starbucks, where the sodas are near the registers and are viewed by thousands of customers daily, is a big blow to Jones Soda.

"It probably doesn't represent much loss of volume, but selling in Starbucks has tremendous marquee and presence value. That would be what Jones is losing," Sicher said.

Jones Soda's volatile stock closed Wednesday at $15.68, down 4 percent on the Nasdaq stock market.

Shares of Jones Soda have lost more than half their value since hitting an all-time high of $32.60 on April 16, following a huge run-up after the company announced it had secured a national distribution deal to be in major retail stores.

P-I reporter Craig Harris can be reached at 206-448-8138 or craigharris@seattlepi.com.

[Paula L. Greenleaf]

Howard Schultz is all style and no substance. And like it's illustrious, Chairman, Starbucks is all sizzle but no steak. Mc Donald's continues to take share from Starbucks. And why not? After all McD's makes coffee that actually taste better and cost less. Whether you're in the Pacific Northwest or any where else in the U.S., it's difficult to compete in a business environment when your competitors make a better product and sell it for less.

[PoutyBarista]

Let's see, the analyst said that the financial gains came from "cutting the fat." You do know what he means by fat, right?

THink 401k, vacation time, non "optimal" scheduling, etc. The analyst also said that BUX needs to KEEP cutting the fat.

[CNLLabor]

@Mowie-Howie-Wowie a nerve hit with a strike so sharply must be close to the heart- could it B, dare I think it, the one who's name shall not B spoken of here w/ a tone of cynicism? HS if so then

[Person With Insights]

Notice how Howard attributes the company's success to his transformation agenda. He wasn't saying that for the past 3 quarters when the stock price was tanking. In fact, he made painful efforts to stress that the company's finances were entirely tied to the recession. Now that the economy has bottomed out, he wants to say that his transformation agenda and his efforts brought about favorable earnings. What an ego maniac.

On the cost cutting topic, give credit to Cliff and Peter. Folks can hate them for putting strain on stores and store managers. I won't disagree if store partners express that viewpoint. However, purely from the perspective of delivering on a promise to cut costs, they stepped up and delivered. If it weren't for these two, the company would still be in trouble. They are the only two executives who actually know how to save money.

Michelle, Howard, and Arthur spend, spend and spend. Howard will be an undisciplined spass. It costs money to clean up the mess he creates. Ever hear the phrase bull in a china shop? Arthur has got ideas, but is completely indifferent to the costs of executing on those ideas. Anyone examine the cost of opening up the non-branded Starbucks store and whether it will generate a return on investment that is comparable to a branded Starbucks store? That's his baby, you know. Michelle is a dud. She needs to borrow ideas from outside parties. Invariably, we pay those outside parties.

In short, I'm please the stock price is up. I'm please we're making a decent profit. I'm terribly afraid of the long term direction of the company with Howard, Arthur, and Michelle in charge, especially as the company needs leadership as competitors like McD, Dunkin, and Nestle leverage their money and muscle to take away our customers.

[jc]

Insights speaks the truth. Cliff and Peter are carrying the company on their backs right now, or at least carrying the load of cost cutting. It sure as hell wasn't the Vivanno or oatmeal or the strawberry vivanno smoothie frappucino yadda yadda whatever it's called.

[Melody (reply to Jc and Person with Insights)]

@ Jc & Person With Insights: I've been meaning to come back to what you wrote. I have my own thoughts on the leadership of Starbucks which isn't based on much, but what I do know is this: you may be right that Cliff and Peter carry the day and shine in cost-cutting in a time of need for cost-cutting. (And I don't even know if you're right!!!) However a great organization must have leaders that shoot from the hip (the innovators), lead from the heart, understand all the elbow grease, and analyze from the head. It takes all of these people. The business that cuts one of these characters out is missing an opportunity or decides that one of them is not necessary may cut off their own nose to spite their face ...Pardon the puns and typos!

[Coffee Slinger]

Sucking the trans fats out of pastries is really not going to make a difference. Making your strawberry sauce all natural really didn't help. With the ecomonic crunch its all about how much people are willing to pay.

With independent coffee stands offering two dollar latte specials all the time, people will take the cheaper route for their fix.

I work in a licensed store inside an albertson's people don't want to pay 1.95 for a donut when they can go back to the bakery and get one for 79 cents.