Starbucks Troubles Continue in Q2

Published on April 30, 2009 | Comments: 0
Coffee retailer Starbucks, who posted its first-ever fiscal loss in August 2008 and has financially struggled since, continued slumping in the second quarter of its fiscal year 2009. Starbucks reported reductions in net revenues, comparable store sales, operating income, operating margin, and net earnings. Selected highlights and analysis follow:

Comparable Store Sales Drive Net Revenue Decline

During the second quarter, ended March 29, 2009, Starbucks reported consolidated net revenues of $2.3 billion, a 7.6% decrease from Q2 2008. Starbucks primarily attributed this drop to an 8% decrease in comparable store sales, which in turn was caused by a 5% decline in customer transactions and 3% decline in average transaction value.

Restructuring Causes Steep Operating Income and Margin Drop

Starbucks cited $152.1 million in restructuring charges, including more than $100 million in expenses related to closing 123 U.S. company-operated stores, as driving significant reductions in quarterly operating income and margin. Operating income fell 77%, from $178.2 million to $40.9 million. Operating margin fell from 7.1% to 1.8%.

Cost Savings Provides One Bright Spot

Starbucks achieved $120 million in cost savings, exceeding a previously set goal of $100 million. Starbucks anticipates delivering $150 million of cost savings in Q3 2009 and $175 million of cost savings in Q4 2009, with total cost savings for the fiscal year equaling about $500 million.

Store Closures

Since July 2008, Starbucks has announced plans to close about 800 company-operated stores in the U.S., restructure or close 61 stores in Australia, and close about 100 company-operated stores internationally. As of Q2 2009, Starbucks has closed 507 U.S. stores and 64 international stores, and expects to complete most of the other planned closures by the end of the fiscal year.

A Look Ahead

Starbucks expects to add 20 net stores to its international store base by the end of fiscal 2009. This includes the net reduction of 425 U.S. company-owned stores and net addition of 60 international company-owned stores. Starbucks also plans to open 65 net new licensed stores in the U.S. and 320 net new licensed stores internationally. The retailer expects capital expenditures of about $600 million in fiscal 2009, with cash from operations exceeding $1 billion and $500 million in free cash flow.

Recent Starbucks Activity

Starbucks had a busy second quarter. In addition to store opening and closure activity, significant Starbucks activity included:
  • Expanding its line of premium ice cream products.
  • Releasing a long-term growth strategy.
  • Launching a new discount breakfast pairings menu.
  • Introducing an instant coffee brand.
  • Naming a new president of global consumer products, foodservice and Seattle’s Best Coffee. Starbucks operates more than 11,000 company-operated and franchised stores in the U.S. and more than 4,500 company-owned, joint venture and licensed stores in 43 countries outside the U.S.

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