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Starbucks Posts Loss for Third Quarter

CEO Schultz Cites Tough Economic 'Headwinds' but Says Customers Remain Loyal to Brand

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CHICAGO (AdAge.com) -- Starbucks cited economic "headwinds" and restructuring costs for its dreary third-quarter report. CEO Howard Schultz, however, maintained that the company's brand remains strong, and that customers remain loyal to Starbucks, even if tighter budgets keep them from visiting as often.

The chain posted a 9% jump in revenue, to $2.6 billion, but missed analysts' expectations and swung to a net loss of $6.7 million, compared with with a profit of $158.3 million in the year-earlier period, due to costs associated with store closures and the company's turnaround plan. Same-store sales, or stores open for at least a year, declined by "mid-single digits." Starbucks no longer reports the exact figures.

Mr. Schultz underscored that Starbucks has "taken significant steps to restructure the company" in the sixth months since his dramatic return to the role of CEO. Earlier this week, Michelle Gass, who has been overseeing the turnaround plan, took over marketing, and was given the additional responsibilities of the food and beverage segments.

On a tear
Starbucks has been on a tear in the last month alone to reduce costs and create new-product news. The company has said that it will eliminate 600 U.S. stores and cut another 1,000 non-store jobs. Starbucks also launched Vivanno smoothies nationwide and Sorbetto frozen beverages in Los Angeles earlier this month.

While some customers have groused that the offerings are another step away from the company's core coffee mission, William Blair analyst Sharon Zackfia said that Starbucks is probably looking for a product to replace the once wildly popular Frappuccino, which is now showing signs of "maturity." She said the new products may also be a way to boost afternoon sales.

Mr. Schultz said that in any other economic environment, these launches, as well as the introduction of Pike Place Roast, would have moved the needle on traffic and same-store sales.

"Really, we are facing headwinds in terms of economy that's difficult to crack through," he said. But, he said Starbucks has seen customers trading up to the higher-priced new products. Pike Place has boosted the company's brewed coffee sales across the board.

Mr. Schultz had promised more information about healthier breakfast items, which are supposed to contain whole grain and lean protein, slated for launch this fall. For now, he said, it's too early to discuss, adding that Starbucks has completely revamped its fiscal 2009 calendar in terms of product launches, with more news to come for the holiday season.

Bringing back breakfast
As has been rumored, Starbucks is bringing back the breakfast sandwiches it swore to pull in January. While relatively popular, the smell interfered with the coffee aroma, and therefore the store experience. Mr. Schultz said the products have been reformulated to eliminate the "smell" problem.

While value will be a focal point of the new breakfast strategy, value meals were dismissed out of hand.

"We're not going to go down the fast-food lane and do things that are what I believe not in the long-term interest of the value of the brand and the experience," Mr. Schultz said, adding that Starbucks won't be bundling products for reduced prices. He did say that whatever value proposition emerges is likely to be linked to recently relaunched rewards card. Mr. Schultz added that the cards represent an opportunity for the brand, as more than 1 million people have registered their cards online since April.

There is still speculation that recent changes don't go far enough to restore the once unstoppable company.

"In the past six months, Starbucks has slowed unit growth, hired back several company veterans, and refocused on the 'core' coffee shop experience," UBS analyst David Palmer wrote in a research note. He added that it remains to be seen if these moves will be enough, or if Starbucks needs to consider "business structures more suited to its global brand status," such as franchising or spinning off manufacturing and distribution.
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