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Starbucks profits sink, 300 stores to close

Starbucks Reports First Quarter Fiscal 2009 Results

Starbucks Corporation today reported financial results for its first quarter ended December 28, 2008 and announced additional cost savings initiatives for fiscal 2009.

Consolidated net revenues were $2.6 billion for the first quarter of fiscal 2009, a decrease of six percent, compared with $2.8 billion for the first quarter of 2008, driven by a decline in consolidated comparable store sales of nine percent.  During the quarter, the company recognized $75.5 million in pre-tax restructuring charges, primarily related to the U.S. company-operated store closures, which impacted first quarter of fiscal 2009 earnings per share (EPS) by approximately $0.06 per share.  For the 13-week period ended December 28, 2008, Starbucks reported net income of $64.3 million and non-GAAP net income of $113.1 million, compared with reported net income of $208.1 million for the same period a year ago.  Earnings per share for the quarter was $0.09 and non-GAAP EPS was $0.15, compared with reported EPS of $0.28 in the first quarter of fiscal 2008.

‘In the midst of the weakening global consumer environment, Starbucks is following a well-developed plan to strengthen our business through more efficient operations and by preserving the fundamental strengths and values of our brand,’ commented Howard Schultz, chairman, president and ceo.  ‘We remain focused on driving the discipline and rigor necessary to create long-term shareholder value, and we are taking aggressive steps to excite customers by providing relevant value and innovation, even during this challenging time.’

Troy Alstead, executive vice president and cfo, added, ‘With a solid balance sheet, strong cash flow and healthy liquidity, Starbucks is well-positioned to weather the challenging global economy. We will continue to take the actions necessary to scale our cost structure to meet current business trends while positioning the company to drive margin expansion when the environment improves.’

CLOSING 300 STORES

• As a result of the ongoing, rigorous evaluation of its global store portfolio, the company plans to close approximately 300 additional underperforming company-operated stores, approximately 200 in the U.S. and the remainder in international markets.  These stores are in addition to the approximately 600 U.S. and 61 Australian market store closures announced in July 2008.  The majority of the new store closures are expected to occur during the remainder of fiscal 2009.

• Starbucks has further reduced its fiscal 2009 new company-operated store openings target in the U.S. to 140 new stores from its previous target of 200 new stores.  Internationally, the company now plans to open 170 new stores in fiscal 2009, down from the company’s previous expectation to open 270 new stores.  Accordingly, capital expenditures for fiscal 2009 are now expected to be approximately $600 million, a $100 million reduction from the company’s previous estimate.  The company has also lowered its net new licensed store opening target, and is now expecting to open approximately 125 net new licensed stores in the U.S. and approximately 360 net new licensed stores internationally.

• The company anticipates that the store closures, combined with reduced store openings for fiscal 2009 and other labor efficiency initiatives, could result in a reduction of as many as 6,000 store positions over the course of fiscal 2009. Wherever possible, Starbucks plans to place affected store employees (partners) elsewhere in its store organization.

• As part of the effort to align the company’s non-retail support organization with the current operating environment, Starbucks plans a global workforce reduction that will result in approximately 700 non-store partners being separated from the company in the U.S. and internationally, with about half at the company’s support center in Seattle.

The cost reduction initiatives announced today, combined with $400 million in targeted cost savings announced in early December, increase Starbucks fiscal 2009 cost reduction target to $500 million.  This target consists of anticipated savings resulting from store closures, reduction of support staff and infrastructure, supply chain efficiencies, store operations improvements and various other initiatives across the business. The company’s cost reduction initiatives delivered approximately $75 million of benefit in the first fiscal quarter, and are expected to deliver approximately $100 million in the second quarter, approximately $150 million in the third, and approximately $175 million in the fourth quarter of fiscal 2009.

The aggregate pre-tax charges associated with the additional store closures and headcount reductions are estimated to be up to approximately $230 million.  Pre-tax charges related to today’s announced store closures include approximately $60 million of asset write-offs to be recognized in the second quarter of fiscal 2009.  In addition, up to $140 million for lease termination costs and future lease obligations are currently expected, the majority of which are estimated to be recognized over the balance of fiscal 2009.  Costs associated with severance related to the reductions in workforce are currently estimated to be up to $30 million, and Starbucks anticipates that the majority of these charges will be recorded in the second fiscal quarter of 2009.  Upon the completion of the restructuring actions noted above, cash charges are expected to result in net cash outflow of approximately $100 million, net of related income tax benefits.

Given the uncertainty in the global consumer retail environment, Starbucks is not providing revenue and earnings guidance at this time.



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