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Starbucks Quarterly Profit More Than Triples to $242 Million

Java Giant Beats Street's Expectations, Says It Will Up Marketing Outlay

By Published on . 8

A correction has been made in this story. See below for details.

CHICAGO (AdAge.com) - Starbucks CEO Howard Schultz credited innovation, cost-cutting and enhanced customer experience for a big company milestone today: a return to profitable growth. The chain posted its first quarterly same-store-sales gain in two years, up 4%. To keep things humming along, the company warned investors of "significant marketing increases" in the offing.

Howard Schultz
Howard Schultz Credit: AP
"Today, I am pleased to report continued progress in our efforts to transform Starbucks and return the company to sustainable, profitable growth while at the same time [remaining] true to our core values and guiding principles," Mr. Schultz said during the earnings call today. Warily reporting same-store-sales gains as many quick-service competitors are suffering declines, he repeatedly warned that the environment is still extremely uncertain, and consumers are still careful with their cash. However, Starbucks' consumer research shows higher satisfaction in every major indicator, such as value perception and experience, compared with a year ago.

Via introduction
For its fiscal first quarter ended Dec. 27, the company's earnings more than tripled to $242 million, or 32 cents a share, handily beating expectations of 30 cents a share. Sales also increased 4%, to $2.7 billion.

During the quarter, Starbucks staged the national launch of its Via instant-coffee product, which included rare TV advertising and an in-store taste test. For the holidays, when Starbucks usually brings out TV ads, the brand focused on social-media efforts to drive consumers into stores for a love-themed CD compilation. Mr. Schultz added that social media remains integral to the company's marketing. Starbucks is the No. 1 brand on both Facebook and Twitter, in terms of fans and followers.

Starbucks' higher sales at stores open more than a year was driven by higher transactions. While U.S. traffic was flat, the average sale grew 4%. Starbucks' chief finacial officer, Troy Alstead, said purchases of Via drove more than half of the transaction increases, equivalent in itself to a 2% same-store-sales increase. Mr. Alstead added that Starbucks has seen very little cannibalization to its in-store packaged coffee sales, and that customers who tried Via three-packs tend to come back and buy larger sizes. Starbucks has, however, suffered declines in packaged coffee sales at grocery, where Via isn't yet sold. The company plans to increase marketing support to combat those declines.

Branding campaign success
Mr. Alstead added that Starbucks has begun to see sales improvement as a result of the chain's first-ever branding campaign, launched with agency BBDO, New York, last May. To that end, he said the company will "significantly increase" marketing spending during the second and third fiscal quarters, by about four cents per share. Mr. Alstead added that the increased branding support will be in addition to planned support for Via, which will be introduced in grocery stores later this year.

Starbucks has also been looking for opportunities with new customers by way of its Seattle's Best Coffee brand. Subway now serves Seattle's Best at 9,000 U.S. locations. Mr. Schultz said that Seattle's Best is an alternative to Starbucks' flagship brew in its "more approachable flavor profile."

"It's clear to us that SBC is a hidden treasure of the company in terms of its mass appeal," Mr. Schultz said. "We think we can distribute SBC in multiple channels where Starbucks [coffee] wouldn't be available or appropriate, like Subway." Now Starbucks is talking to other QSRs looking to break into the breakfast business, providing upstart fast-feeders with a big-name brew with which to take on McDonald's McCafe. Seattle's Best is also aggressively looking for franchising opportunities, something Starbucks continues to eschew for its marquee brand, with the notable exception of airports.

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CORRECTION: An earlier version of this story reported that U.S traffic grew 1%. Starbucks' total traffic grew 1% during the quarter, but was flat in the U.S.

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