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Starbucks: Not Reheated Yet

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Starbucks (Nasdaq: SBUX  ) delivered lukewarm first-quarter results and deeply bitter news, given the cascade of corporate layoffs coursing through the headlines these days.

First-quarter net income plunged 69.1% to $64.3 million, or $0.09 per share. This figure included $75.5 million in restructuring charges related to store closures in the quarter. Revenue fell 5.5% to $2.6 billion, while same-store sales dropped a rather abysmal 9%.

In some glimmer of good news for shareholders, Starbucks reduced its short-term debt with the $521 million in free cash flow it generated in the quarter. That's a relief for those of us who would rather see strong balance sheets and manageable debt loads in these turbulent times.

The big story, of course, was that Starbucks plans to close 300 additional stores (200 in the U.S., and 100 in international markets). The majority of the closures will take place during fiscal 2009. Starbucks said this could result in the loss of about 6,000 store workers in fiscal 2009, although it said it will work to place some in other stores. These plans increase Starbucks' fiscal 2009 cost-savings goals to $500 million (from $400 million before).

Starbucks isn't the only retailer cutting jobs, of course. Other retailers have recently expressed similar tidings, including Best Buy (NYSE: BBY  ) and Target (NYSE: TGT  ) . By enacting mass layoffs, they may risk joining big employers throughout the economy cutting their own throats. A few days ago, I felt disappointed that Starbucks' changes to management pay incentives didn't go further; I'm no happier now that the company's announced plans to cut even more of its rank and file.

I still believe in Starbucks for the long term, and at these levels, it's looking cheap. But the company certainly must adjust to new economic realities, which call for fewer stores than the bubble era seemed to dictate. In the long haul, these moves should help it boost its profitability; in the short term, they'll almost certainly try Starbucks investors' patience. The bad news just keeps on coming for the java giant, but Starbucks has yet to unleash any of the innovation I'd hoped for in response. Of course, in these terrible economic times, survival may be the best idea of all. 

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Starbucks and Best Buy are Motley Fool Inside Value and Motley Fool Stock Advisor selections. The Fool owns shares of Starbucks and Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2009, at 2:54 PM, SPPUHR wrote:

    Help me understand how SBUX measures up in the 5 secrets of value invest?

    1. the street has been buying this stock all the way down!

    2. Own companies..what is SBUX's competitive advantage?

    3.Value? Catalysts? SBUX is in violation of their lending agreement and Moody's has had a negative outlook since last fall and will downgrade again if economy got did?

    4.DCF? No guidance from no same stores announcements, negative sales growth and three store closures in one year?

    5. Don't overpay for what growth?

  • Report this Comment On January 29, 2009, at 4:23 PM, joemas wrote:

    I don't see WHY you believe. There are many stocks to buy that have better and more compelling reasons to put up your FOOL money... The previous comment tells you that there is nothing supporting this company's stock price but feelings. I posted the folowing comment to your previous love letter about SBUX and I am afraid that you have your eyes wide shut. Will it be a $15 stock again and the answer is yes but the Dow may be at 12000. As a growth stock it is "closing stores" and "focusing" its efforts. It is going the wrong way on a one way street... Sorry.....

    I think you beleive your argument, but in this economy there are things you need and then there are things you may not need. 2009 is going to be a hard year for Star Bucks. Just look at the number of unemployed and you can see one reason for negative SBUX. Then the competition has heated up with other coffee houses and fast food chains, even the local gas station -Sheets- has a cappuccino / espresso / latte machine. Sorry to be contrary to your opinon, but not what I would think of for the stock of 2009. WMT or MCD would be a better choice in the retail area, but this sector is going to hurt for some time into 2010 at least....

  • Report this Comment On January 29, 2009, at 7:57 PM, mberan wrote:

    You've been a long term "tout" for SBUX. Please, get off it. They're dead. Why do you refuse to see this. 6,000 additional employees laid off. That's after how many closings? They're almost completely out of Australia, barely maintaining a presence. This is due in large part to the strength of the McCafe's by McDonald's there. What's going to happen when the US McDonald's completes it's coffee program?

    I'm really tired of The Fool writers continuing to tout dead stocks. Are you trying to fill up space and make the subscription seem like it's worth something?

    SBUX-still over roasted, overpriced and over hyped (on The Fool).

  • Report this Comment On January 31, 2009, at 4:58 AM, dividendgrowth wrote:

    Just by looking at the venom of the above three SBUX bashers, I think SBUX is a (cautious) buy at this point.

    Depression usually destroys weak startups or wannabes, and the world is big enough for both MCD and SBUX, just like it's big enough for both KO and PEP.

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