Starbucks Hopes Early Prep Pays Off in '09

SEATTLE-Starbucks closed 200 US stores in the final three months of its fiscal year and will shutter an additional 400 as it retrenches for what is expected to be a rough 2009 for retailers. As a result of the closures, the associated layoffs and lighter traffic at its remaining stores, the company earned just one penny per share–a 97% decline from the same period last year–on a 3% increase in sales. Without the restructuring charges the company would have earned $0.10 per share, three pennies shy of analysts’ consensus estimate.

The increase in sales was due largely to there being more stores. Despite the closing of 200 stores the company had 132 net new store openings for the quarter and 1,669 for the year. Same-store sales–stores that have been opened at least a year–slumped 8%, which Starbucks blamed on “deteriorating traffic trends in the US and a decline in the average value per transaction.” As of the end of September, the company had 16,680 stores globally, including 11,567 in the US.

For the full year, Oct. 1, 2007 through Sept. 30, 2008, the company earned $315.5 million, or $0.43 cents a share, compared with $672.6 million, or $0.87 cents, in 2007. Sales totaled $10.4 billion, up 10% from 2007. Same-store sales for the year fell 3%. The company’s share price was trading in the $26 range this time last year but is now sits just below $10. Starbucks outgoing CFO Peter Bocian assured analysts that he sees “little risk of breaching out coverage covenant” even though lease termination costs will be higher than expected.

“The closures helped put us on a path to stronger credit ratios in the medium term as we boost operating cash flow and reduce rent, (and) the cost reduction initiatives we’ve completed around staffing and real estate along with a slower store expansion target will help offset the impact from the sales deleverage we’ve been experiencing, putting Starbucks in a better position to generate higher free cash flow going forward,” he said. “The recent squeeze in the credit markets elicited a lot of questions from investors particularly near the end of the quarter related to our CP [commercial paper] program and our ability to borrow so I thought it might be beneficial to remind you of the $1 billion in aggregate credit capacity we have and, in the event the company has difficultly placing CP, we can elect to borrow against the credit facility.”

Schultz told analysts that the company’s revised US growth strategy “focuses less on adding stores and more on building the business within existing stores by prioritizing profitability and the customer experience. Internationally, Schultz acknowledged that the US downturn has spread into Europe and beyond but added that, because its international strategy relies heavily on the licensed store model, it will continue to contribute to growth in the coming year.

The company entered two new international markets in the past year, the Czech Republic and Argentina, and recently opened its first store in Portugal. Acknowledging that some real estate decisions made during the last few years were not good investments, the company in recent weeks shuttered 61 of 84 company-operated stores in Australia.

“We have made tough decisions in fiscal ’08 over store closures, streamlining our leadership structure and non-store organization as well as doing the work necessary to reduce our capital allocation for fiscal ’09. In addition, we took steps to improve efficiencies in our store operations,” Schultz told analysts. “Because we took action early we enter fiscal ’09 with a re-architected cost structure [and] a much healthier store portfolio.”

Indeed, after stating in its earnings report that it expected the final three months of the calendar year to be its “toughest” for year-over-year comparisons, in the ensuing conference call with analysts it was revealed that the pace of sales in October is comparable to the preceding three months, which could mean the bottom of the cup is near. Moreover, albeit compared to a weak fiscal 2008, Schultz told analysts he expects earnings to improve in fiscal 2009.

More specifically, Starbucks incoming CFO, longtime employee Troy Alstead, told analysis that even with negative 2% comps in fiscal ’09 the company can still drive more than 25% EPS growth and acbieve $0.90 non-GAAP earnings per share. Even if comp growth ends up being -5%, he said the company could still deliver non-GAAP EPS of around $0.80, which is greater than 10% growth.