Starbucks profit plunges 97% due to a sharp economic downturn

On Monday, the Starbucks (SBUX) reported that net income had dropped 97 percent due to a sharp economic downturn, where there are only fewer people are in the mood to indulge.

Starbucks reported a modest profit of $5.4 million, or a penny a share, compared with $158.5 million, or 21 cents a share, in the period a year ago. Revenue rose 3 percent, to $2.5 billion, up slightly from $2.4 billion a year ago. The company's operating expenses rose because of higher payroll, higher rents and inventory write-downs, while operating profit margins shrank to 0.6 percent, from 10.2 percent in the year-ago period. It blamed weak traffic in its American stores, the source of 88 percent of its revenue.

Down more than 56 percent already this year, shares of Starbucks fell 2.75 percent Monday in after-hours trading, to $9.92.

They said they had identified the macroeconomic storm early and taken action - announcing 600 store closures over the summer and cutting expenses.

The company's chief executive, Howard Schultz, said Starbucks was also reacting to economic conditions by introducing new marketing programs that reward loyal customers, like a new Gold Card that costs $25 and entitles buyers to 10 percent discounts and free wireless Internet access in stores.

"In this environment, the rules of engagement no longer apply," Schultz said in the call. "We are keenly aware of the importance of value to our customers."

The company plans to end fiscal 2009 with 225 fewer company-owned stores than at the beginning of the year.

Internationally, Starbucks is planning to open about 700 new stores in the fiscal year ahead, but two-thirds of those will be licensed cafés that are run by other companies, like supermarkets and bookstores.

Many Starbucks watchers say that the company has a resiliency with its core customers that it can build on in the months and years ahead.

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Sources :

The International Herald Tribune: Starbucks profit plunges 97 percent, November 11, 2008

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