Starbucks profit up 20%; no plans to raise drink prices

Starbucks' profit grew 20 percent for the second quarter ended April 3, as the chain added cafes slowly and improved sales of coffee and other products in grocery stores.

Its profit was $261.6 million, up from $217.3 million a year earlier. It earned 34 cents a share, about 4 cents lower than it would have, had coffee prices not spiked in recent months.

Starbucks has no plans to raise drink prices across the board to offset higher costs, executives told analysts during a conference call Wednesday.

"There's going to be a lot of pressure on large and small players in the marketplace," CEO Howard Schultz said, and the Seattle company is "making sure our customers are seeing the fact that Starbucks is providing value for them at a time when perhaps others are going to have to raise prices in a significant way."

While Starbucks adjusts prices on a market-to-market basis, often lowering them, it has not had an across-the-board price increase since 2007, which was followed by a drop in traffic at its U.S. stores.

"They're not planning to raise prices right now, but that doesn't mean they won't," said Sharon Zackfia, an analyst at William Blair & Co. in Chicago. "They've been making surgical price increases in certain markets."

Competitors from independent coffeehouses to Panera Bread have raised prices over the past year to offset the escalating cost of coffee, which keeps hitting new multiyear highs.

Panera said Wednesday it boosted prices more than expected in the second quarter, mainly because it had to raise prices for coffee so much. Panera's chief financial officer, Jeffrey Kip, called the increase "in line with competitors."

Fragile as it is, the improved economy helped boost Starbucks' U.S. sales by 6 percent to $1.9 billion for the quarter. International store sales rose 15 percent to $609.8 million.

The star of the quarter was the company's relatively small grocery-store segment, which grew sales by 30 percent to $204.7 million.

Starbucks recently stopped using Kraft as its distributor for its products in grocery stores. Now a group of other companies distributes its whole beans, bottled Frappuccino, instant coffee and other products into grocery and convenience stores.

U.S. sales of Starbucks' instant coffee alone rose 11 percent in the grocery channel, although Starbucks does not give the dollar amount.

Starbucks added just five stores in the last six months, compared with 29 stores during the same period last year and a pace of seven stores a day in its expansion heyday.

The chain is focusing on international growth and plans to double its number of cafes in South Korea — 339 — over the next five years, Schultz said. "We're understored in markets like Brazil and Russia, and even in a country like Mexico, which five years ago we thought had growth opportunities for 250 stores; we're going to get to 500 before we know it."

Starbucks said nine of its 900 stores in Japan will close permanently after the earthquake and tsunami.

Altogether 200 stores closed or had limited hours after the disaster in a country that is one of Starbucks' three largest markets outside the U.S. The impact of those slowdowns will appear in its third-quarter earnings report.

The company took a small, undisclosed charge for those closures. It also took a 1 cent charge to earnings because of the bankruptcy of Borders Group, which is closing stores that house Seattle's Best Coffee cafes.

Starbucks' profit for the quarter was what analysts had expected, but its forecast for the year was slightly worse, causing investors to send shares down 69 cents to $36.50 in after-hours trading Wednesday. Before quarterly results were announced, the stock had gained 59 cents to close at $37.19 a share.

It has traded between $22.50 and $38.21 over the past year.

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