Starbucks to cut up to 12,000 jobs, close 600 stores

Lisa Baertlein
Reuters
Wednesday, July 2, 2008

Starbucks Corp (SBUX.O) said on Tuesday it plans to close 600 underperforming U.S. stores and cut up to 12,000 full- and part-time positions, as it copes with an economic downturn and increasing competition.

The coffee seller, bracing for its first full-year profit decline since 2000, has been grappling with the slowing U.S. economy and consumer spending at the same time that major competitors like McDonald's Corp (MCD.N) have begun attacking its core business.

Starbucks plans to close the company-operated stores by the end of March 2009. The related job cuts would reduce the company's U.S. workforce by about 8 percent.

The news lifted shares nearly 5 percent.

In a conference call with analysts, Chief Executive Peter Bocian said the move should improve company's domestic profitability and help it meet previously issued forecasts calling for accelerating earnings for fiscal 2009 through 2011.

In January, Starbucks brought back founder and chief executive Howard Schultz to turn around the company. Soon after, Schultz targeted 100 stores for closure -- a number that grew by 500 when firm plans were announced on Tuesday.

He has also slashed plans for store openings and shifted the company's most ambitious expansion efforts to international markets.

"At this point, management has decided that 2008 is a wash and to throw in everything but the kitchen sink to get ready for growth in 2009 and beyond," said William Blair analyst Sharon Zackfia.

"It's another sign that management doesn't have their head in the sand," said Zackfia, who has an "outperform" rating on the stock.

Starbucks said the 600 stores are either unprofitable now or are not expected to meet future return thresholds. All of the targeted units are close to another company-operated store, Bocian said.

"This is validating some of the critics who said they were opening stores too close to one another," said James Walsh, an analyst at Starbucks investor Coldstream Capital Management.

Those critics complained that the company had overbuilt in the United States -- particularly in major urban areas like Manhattan, where it is not unusual to see several Starbucks in a single city block.

The Seattle-based company was also an aggressive builder in California and Florida. Those states experienced red-hot growth during the housing boom and have been hardest hit by the U.S. housing downturn.

Oppenheimer & Co analyst Matt DiFrisco said he was "very encouraged" by the company's announcement.

"It helps remove some of the cannibalization that the company brought on itself," said DiFrisco, who also has an "outperform" rating on Starbucks shares.

Starbucks said the closures are spread across all major U.S. markets and that 70 percent of the targeted stores have been open since the beginning of fiscal 2006.

Total pretax charges associated with the planned U.S. company-operated store closures, including costs associated with severance, are estimated to be in the range of $328 million to $348 million.

Starbucks also trimmed planned openings for its upcoming fiscal year ended September 2009. It now plans to open fewer than 200 new U.S. company-operated stores, down from 250 previously.

The stock rose to $16.35 in after hours trading, up 4.7 percent from its close of $15.62 on Nasdaq.

While investors cheered the announcement, analysts were quick to point out that a further worsening of the U.S. economy or steep increases in gas and food prices would put additional pressure on the company known for its premium-priced coffee drinks, such as $3 to $4 lattes.

"Consumers are not in the spending mood," said Bob Goldin, executive vice president at restaurant consulting firm Technomic.

(Additional reporting by Nichola Groom and Jennifer Martinez; editing by Jeffrey Benkoe, Leslie Gevirtz)
SOURCE: Reuters