Profit takes big hit as Starbucks readjusts to bad economy

It's been a rough year for Starbucks, which saw a 97 percent profit drop in the fourth quarter and a sharp decline in traffic and spending at U.S. stores.

Still, CEO Howard Schultz said the company is in better shape after a year of layoffs, store closures and other moves to reposition the company in the harsh economy.

"Our year of transition and transformation is over," Schultz said during a conference call after Starbucks released earnings for the quarter ended Sept. 28.

Coffee drinkers continued to pinch pennies in the fourth quarter, visiting Starbucks less frequently and spending less when they did. The trend meant an 8 percent decline in U.S. same-store sales, a key indicator of retail success. Same-store sales are those at stores open at least 13 months

Starbucks earned $5.4 million — a penny a share — in the fourth quarter, a big drop from its $158.5 million profit in the same quarter last year. That was due in part to charges of $105.1 million for restructuring, which includes closing unprofitable U.S. stores and eliminating about 1,000 non-store jobs.

About 65 jobs were cut last week at the Kent roasting plant.

Profit for the full year fell 53 percent to $315.5 million, or 43 cents a share, a figure that reflects about 28 cents a share in restructuring charges.

Starbucks saw an annual 3 percent decrease in same-store sales. In its heyday, it regularly posted double-digit growth in same-store sales.

Problems began to emerge last year, with declining traffic at U.S. stores and same-store sales growth slowing to an all-time low.

"We felt the effects of the downturn early and have been preparing for this uncertainty for some time," Schultz said.

The company illustrated its new resilience by estimating how much profit it could make next year if same-store sales continue to fall.

Even if that measure slides 7 percent more next year, the company said, its profit excluding restructuring charges will be in line with this year.

"That shows they've gotten pretty serious about cutting costs, and they've gotten rid of really underperforming stores," said John Owens, an analyst at Morningstar in Chicago.

Starbucks shares fell 35 cents to $10.20 during regular trading Monday. Earnings were released after the market closed, and shares dropped 28 cents more to $9.92.

Schultz reiterated hopeful comments he made last month, saying "October may have represented a bottoming-out milestone for our company," but did not quantify how much of a bounce Starbucks has seen.

"Recent retail results indicate we may be faring better than many high-end retailers," he said.

Owens thinks the sales improvements might be a result of Starbucks' closing underperforming U.S. stores, because "other retailers haven't been as aggressive shutting down stores and restaurants."

During the fourth quarter, Starbucks closed 205 of the 600 stores slated for closure. The rest will close this fiscal year.

Starbucks is exiting store leases early, which it now says will cost about $170 million — more than the $120 million to $140 million it originally estimated.

Traffic at U.S. stores dropped 4 percent during the quarter, and the average amount spent by customers fell 3 percent, the company said.

Starbucks' international business is hurting, too, with flat same-store sales during the fourth quarter mostly because of traffic declines in Canada and the United Kingdom.

The company scaled back expansion plans for fiscal 2009 to include 700 new international stores, down from 900. It ended September with 5,113 international stores.

Starbucks had 11,567 U.S. stores and plans to open enough new stores that, even after closures, it will have only 20 fewer U.S. stores a year from now.

Growth has made it harder for Starbucks to bring new products to market quickly, Schultz said. The launch of Vivanno smoothies last summer is one example.

"When the banana supplier heard the order on a daily basis, he almost had a heart attack," Schultz said.

That means Starbucks sometimes moves ahead with new ideas before all the details are ironed out, he said.

"In this environment, it's very, very important to be decisive, but you're not going to have perfect information. ... There are issues you're going to have to resolve on the fly."

Pike Place Roast, a new brewed coffee Starbucks launched this year, helped it gain market share in the brewed-coffee market, Schultz said.

It got national visibility with Starbucks' commercial on "Saturday Night Live" promoting free brewed coffee on Election Day.

The TV spot was "perhaps one of the most successful promotional events in the history of the company," Schultz said in a phone interview Monday.

It spread through social-networking sites like Facebook and MySpace, he said, driving millions to Starbucks for free coffee on the same day the company launched its first-ever Thanksgiving coffee blend, created with Seattle restaurateur Tom Douglas, as well as a Gold Card with benefits for regular customers.

Perhaps owing to his excitement about Election Day traffic, Schultz mentioned Starbucks' "base" more than once during Monday's conference call.

"It's important to maintain our core customers," he said, "and do everything you can to ignite your base."

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