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Starbucks looks overseas for profit growth

Starbucks Corp. is dialing back expectations for its U.S. stores but has a three-year plan for snazzy new drinks and future profit growth fueled by aggressive international expansion.
/ Source: The Associated Press

Starbucks Corp. is dialing back expectations for its U.S. stores in light of economic uncertainty but has a three-year plan for snazzy new drinks and future profit growth fueled by aggressive international expansion.

As expected, the company said Wednesday its fiscal second-quarter profit sank 28 percent as U.S. consumers responded to rising food and gas prices by making fewer latte runs.

The coffee purveyor slashed 30 additional store openings from its already-scaled-back plan for 2008 and said it will open fewer than 400 stores per year in 2009 through 2011.

International openings will increase at a far faster clip, though, with 975 this year and a projected 1,300 in 2011. Starbucks expects to have 21,500 stores worldwide by the end of fiscal 2011.

Starbucks’ financial goals for the coming years reflect worries about a protracted U.S. economic downturn and rely on international stores — particularly ones run by licensed partners rather than Starbucks itself — to drive profit.

The company forecast earnings of 90 cents to $1 per share in 2009, $1.10 to $1.20 per share in 2010, and $1.35 to $1.50 in 2011, predicated on a 20 percent average rise in sales each year internationally but just 6 percent growth in the U.S.

Starbucks shares gained 3 cents to close at $16.23 Wednesday before the results were released. The shares fell 11 cents in after-hours trading.

Concurrent with its heavy focus on international growth, Starbucks is working through a series of high-profile changes meant to stabilize U.S. sales. Chairman and Chief Executive Officer Howard Schultz has already picked out new coffee brewing machines and yanked fragrant breakfast sandwiches that masked the smell of coffee.

Schultz said Wednesday that the company will launch three new types of drinks in the U.S. this summer:

  • A health-conscious smoothie-style line.
  • An icy Italian coffee-based drink that’s indulgent, low-calorie and less expensive than a Frappucino.
  • An energy drink that adds extra kick to the existing Starbucks DoubleShot, which is sold in cans and will also be prepared fresh in stores.

The CEO said new health-conscious foods are planned for fall, and that the company will continue to experiment with new menu items through the holidays and into 2009.

In a conference call, Schultz repeatedly told analysts that the trouble Starbucks was experiencing in the U.S. was not the result of increased competition from chains like McDonald’s Corp., which is testing espresso drinks in some cities.

“We continue to come under very heavy consumer pressure due to the economy,” Schultz said in an interview. “Most retailers, restaurants, certainly other premium brands are facing similar headwinds.”

Sharon Zackfia, an analyst for William Blair & Co., said “management should be saying that at least 30 times a day to every investor it talks do. Given that Starbucks is such a unique brand and company, the assumption is that when things are good or when things are bad, that it’s Starbucks-specific.”

The economic climate, Zackfia said, affects Starbucks just like it does other retailers and restaurants.

For the quarter ended March 30, Starbucks’ net income sank to $108.7 million, or 15 cents per share, from $150.8 million, or 19 cents a share, in the same period last year.

Revenue rose 12 percent to $2.53 billion from $2.26 billion in the year-ago quarter.

Starbucks blamed the weakness on U.S. consumers making fewer trips to its stores, especially in areas hit hardest by the housing market’s collapse, like Florida and California.