Starbucks books solid quarter, decides to become a fast-food player after all

Starbucks is backing away from its long-held dislike of fast food to partner nationally with Subway. Its Seattle's Best Coffee brand will be in 9,000 Subway stores in the U.S. by the end of this year, and will move into more of the sandwich shops next year, CEO Howard Schultz told analysts during a conference call about its quarterly results Thursday.

"Candidly, given the fact that fast-food players have gone after the breakfast business — specifically McDonald's — in such a big way, and made such a big push into coffee, their core competitors want to compete directly with them in that space," Schultz said. "SBC is in the infant stages of what it could be domestically and internationally."

The company declined to give details, pending a news release planned for today. Subway said almost a year ago that it would test SBC brewed coffee in about 1,900 locations.

Investors sent Starbucks shares up quickly Thursday after it posted a fourth-quarter profit of $150 million, or 20 cents a share, better than analysts had expected and a vast improvement from its $5.4 million profit during the fourth quarter last year.

Sales dropped 4 percent to $2.4 billion, but the company more than made up for it with $580 million in annualized cost cuts — $30 million better than it had promised Wall Street. For the quarter, operating expenses were down 11 percent to $2.3 billion.

Starbucks also saw its seventh consecutive quarter of same-store sales declines, but the 1 percent drop was the least severe in all those quarters — and better than the 3 percent decline that many analysts expected. It's an improvement from the 5 percent drop last quarter and the 7 percent decline during the fourth quarter a year ago.

Starbucks has long recoiled at the thought of being a fast-food player. Schultz said in his 1997 book, "Pour Your Heart Into It," that he was pained by comparisons to fast-food businesses.

The company stuck by that a few years ago when McDonald's approached Starbucks about supplying coffee for its new espresso program.

"We passed because it simply was not a good brand fit, and we're confident that was the right decision," Starbucks spokeswoman Deb Trevino said earlier this year.

It hasn't always been as cautious with the Seattle's Best Coffee brand, which it bought in 2003. SBC supplied some McDonald's stores in the Pacific Northwest until a couple years ago, and it has traditional franchises that Starbucks does not.

But there's a difference between being in some fast-food stores in the region and partnering nationally with a company that will soon pass McDonald's in total locations worldwide (about 32,000).

"It's certainly a change in attitude from what they've said in the past," said R.J. Hottovy, a restaurant analyst who follows Starbucks for the research firm Morningstar. "McDonald's probably would have been a stronger partner, given that they still have some company-owned locations, a stronger brand name and a better relationship with franchisees."

Still, it's a sign of progress that Starbucks is realizing what it has with SBC, he said. "It's a way of expanding in the U.S. without diluting the Starbucks brand, and Subway is probably just as excited to have a relatively well-known brand name partnering with them as well."

After a fiscal year in which it closed more stores than it opened — bringing its worldwide total to 16,635 — Starbucks plans to slowly begin expanding again. It expects to add 100 stores in the U.S. and 200 stores internationally in the coming year.

On the call Thursday, Schultz was particularly excited about the company's prospects in China, which he said will someday be its biggest foreign market. Currently, its biggest international markets are Canada and the U.K.

On a recent visit to China, Schultz said, he was reminded of Starbucks' early growth in the U.S. "The China market, which now has nearly 700 stores, holds the potential for thousands," he said.

During the quarter, Starbucks took $53 million in restructuring charges, compared with $99 million in the fourth quarter last year. Without the charges, it would have earned 24 cents a share, better than the 21 cents that analysts expected, according to Thomson Reuters.

Its overhead was up 38 percent to $133 million because of higher performance-based compensation, Chief Financial Officer Troy Alstead said during the call with analysts.

Starbucks expects its Via instant coffee, which recently rolled out in the U.S. and Canada, to be "profit neutral" for fiscal 2010, because of upfront investments in selling the product outside Starbucks stores, Alstead said. Via recently became available in Costco and Target stores.

In answer to a question from the analyst community, which is always eager to know when a company flush with cash will start paying a dividend, Alstead said Starbucks will wait until after its current holiday quarter to make any decisions about how to use excess cash.

When its fiscal year ended Sept. 27, Starbucks had $599.8 million in cash, more than double from $269.8 million a year earlier.

For the year, it earned $390.8 million, up 24 percent from the previous year, on net revenues that fell 6 percent to $9.8 billion.

Investors applauded the results, sending shares up quickly after Thursday's earnings announcement, which came after the close of regular trading. Shares gained 49 cents to $19.70 in regular trading, and another 73 cents to $20.43 in after-hours trading.

Starbucks stock has traded between $7.06 and $21.11 over the past year, down from highs approaching $40 in 2006.

— Melissa Allison

Bellevue-based Coinstar posted a bigger third-quarter profit Thursday, helped by the recent sale of its entertainment business to a Colorado company set up for the purchase.

Coinstar made a quarterly profit of $41.4 million, or $1.34 a share, up from $4.5 million, or 16 cents, a year ago. Revenues rose 45.5 percent to $296 million.

Coinstar also announced that James Blanda, 66, a partner with executive services and consulting firm Tatum, will become interim chief financial officer Nov. 10. As previously announced, CFO John Harvey will resign Nov. 9. — AM

Seattle pop marketer Jones Soda posted a loss of $1.5 million, or 6 cents a share, for the third quarter, a 72 percent improvement from its $5.3 million loss in the same quarter last year.

CEO Joth Ricci called it the company's best performance in nine quarters, and said it reflects the progress Jones Soda has made in streamlining its business.

Revenue was down 18 percent to $7.2 million, an improvement from the second-quarter revenue decline of 36 percent.

Operating expenses fell 51 percent to $3 million partly because it laid off 16 people in August, on top of roughly 60 layoffs during the previous year. Its head count is now about 40.

Jones said in a securities filing in August that there is "substantial doubt about our ability to continue as a going concern" and that it had enough cash at that time — $7.1 million — to operate if sales meet its new projections. At the Sept. 30 end of the third quarter, it had $6.1 million in cash.

— MA

Internet jeweler Blue Nile posted a better-than-expected third-quarter profit Thursday, citing strong wedding-related sales and a growing international presence.

The Seattle-based company made a quarterly profit of $2.6 million, or 17 cents a share, up from $2.3 million, or 15 cents, a year ago. Sales rose 2.4 percent to $66.9 million.

Blue Nile raised its fourth-quarter guidance, saying "trends in the business during the third quarter improved sequentially." — AM

HARNN, a brand of Asian-inspired skin-care products, candles and spa accessories, is putting its first U.S. store at Bellevue Square. Opening is set for Saturday, next to the Lego store near Nordstrom. — AM

Retail Report appears Fridays. Amy Martinez covers goods, services and online retail. She can be reached at 206-464-2923 or amartinez@seattletimes.com. Melissa Allison covers the food and beverage industry. She can be reached at 206-464-3312 or mallison@seattletimes.com.