Starbucks to launch marketing campaign, slow store growth as 2Q profit falls 77%

Faced with continuing deterioration in sales and profit, Starbucks plans to launch a multimillion-dollar marketing campaign and slow its growth to 20 net new stores this year.

The campaign will focus "on the quality, value and values that Starbucks offers," Chief Executive Howard Schultz said during a conference call with analysts. "We're confident that our voice and message will break through with current and future customers."

He wants to remind people what Starbucks stands for, and that most of its coffee drinks don't cost $4. In a promotion beginning next week, it will sell 16-ounce iced coffee for less than $2.

The company is also testing new prices in key markets, Schultz said, describing the moves as "minor changes that will lower prices on some of our more popular items such as tall lattes and slightly increase prices on our larger and more complex beverages."

The campaign comes as McDonald's rolls out espresso machines in its roughly 14,000 U.S. stores. Schultz told analysts that speculation about Starbucks losing market share to competitors is "grossly exaggerated."

"We've looked at markets where competitors have tested heavy coffee advertising and one thing remains apparent: Our customers are not trading down," he said.

Starbucks' second-quarter profit dropped 77 percent, to $25 million, or three cents a share. Total sales slipped 7.6 percent to $2.3 billion.

This time last year, before Starbucks felt the full impact of the recession, it planned to open about 1,450 new stores in 2009. Now it is closing stores faster than it's opening them, and the cost of closures, layoffs and lower real estate values took a $152 million bite out of the company's second-quarter profit.

Starbucks' profit excluding restructuring charges was 16 cents a share, which beat analysts' estimates by a penny.

Shares rose 19 cents to $13.69 during regular trading before the earnings release, and climbed another 21 cents to $13.90 in after-hours trading.

Like some other restaurant companies, Starbucks' sales for stores open at least a year improved from the previous quarter. At Starbucks, same-store sales fell 8 percent from a year earlier, an improvement from the previous quarter's 9 percent drop.

"I don't think investors should necessarily be doing cartwheels about that yet," because the previous quarter was so bad, said Sharon Zackfia, an analyst at William Blair & Co. who owns Starbucks shares and whose firm makes a market in the stock. "But the consumer does not seem to be in free-fall any longer, when it comes to eating out, at least."

Starbucks launched its cost-cutting campaign, which is set to shave $500 million in expenses this year, earlier than other companies partly because of how fast it was growing when the recession hit in 2007.

"People forget that Starbucks was pedal-to-the-metal into the recession, so it couldn't brake fast enough," Zackfia said. "It went through the evolution from growth to cost-cutting more quickly than most."

Starbucks closed 123 U.S. stores during the second quarter, chipping away at its planned closure of more than 816 underperforming U.S. shops that began last year. It now has 11,446 U.S. locations.

Schultz gave an update on the Rewards Card that Starbucks debuted last November, which costs $25 a year to use and comes with drink discounts, free wi-fi and free refills of brewed coffee. It now has more than 700,000 cardholders, he said.

He also said that Starbucks' tea latte promotion this winter did not go as well as the company had hoped, but didn't give details.

On the other hand, its new instant coffee product, Via, is going strong in Seattle, Chicago and London and will roll out in other U.S. markets this fall.

Starbucks used advertising and lots of free samples to promote Via's launch in Chicago, compared to a tamer rollout in Seattle.

Schultz declined to share the effectiveness of either approach "other than to say we were satisfied and continue to be satisfied with the success of Seattle and Chicago. The U.K. got limited advertising and has done extremely well, with Heathrow Airport being a fantastic example because of [customers who] travel."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com