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Starbucks Takes Its Lumps

Howard Schultz has had better summers. First he lost a protracted battle with the new owners of the Seattle SuperSonics — a National Basketball Association franchise — when they decided to move the team to Oklahoma City. Then on July 1, the chairman, president and CEO of Starbucks Corp. announced that the world's largest owner of coffeehouses was shuttering 616 stores across the United States.

Most of the stores slated for closure opened in 2006 and 2007 and generated only about half of the typical annual store sales of $1 million, Starbucks officials reported.

As part of its strategic shift, Starbucks will open fewer than 200 stores in 2009, about 50 less than originally projected. For shopping center owners, the news comes at a time when a weakened U.S. economy is already threatening to erode retail sales across the country.

Jeff Green, a retail consultant for 25 years and founder of Jeff Green Partners, blames the closings on Starbucks' zealous expansion strategy, which saturated many markets. “I don't think they ever really got the whole understanding of cannibalization in their sales transfer,” says Green. “If you plunk down a new store and it draws 5% from four surrounding stores, that's a 20% hit to the comp stores, and that is what Wall Street looks at.”

A Starbucks spokesman could not provide a precise breakout of stores closing in malls versus shopping centers, but the company did post a complete listing of the stores on its website in mid-July.

Starbucks typically pays well for choice real estate, so the property owner's challenge is to convert the site to another use without losing much money, Green says. Fast food is a logical alternative, but Green says owners will do whatever it takes to fill the space in most cases.

For Schultz, it is one eye-opener of a homecoming. He returned to the active CEO role in January after eight years away from day-to-day operations. He served as CEO from 1987 to 2000.

Analysts estimate that the closings will eliminate 12,000 positions, or roughly 7% of Starbucks' global workforce. Many employees are expected to be redeployed to other store locations.

“The announcement of more store closures is a clear signal that management is willing to make tough decisions regarding its store portfolio and stick by its return on investment hurdles — rather than just grow for growth's sake,” says Sharon Zackfia, an analyst with William Blair & Co. in Chicago. Starbucks is clearing the decks to enter fiscal 2009 with a clean profit and loss statement, positioned for growth, she says.

It will cost the company an estimated $330 million to close the 600-plus stores, or about 45 cents per share. But will the move drive up Starbucks' stock? It traded at $14.41 in mid-July, down nearly 50% from its 52-week high of $28.60 in August 2007.

For many analysts, the closings don't cut deep enough. “We believe this is an important step toward ultimately stopping the bleeding,” says Marc Greenberg, an analyst with Deutsche Bank in New York. But given the economy, and with McDonald's ready to roll out its own specialty coffee, “it is too early to call a bottom on fundamentals.”

HALF A CUP? Howard Schultz, CEO of Starbucks Corp., has announced plans to close 616 stores in the U.S. Most of the coffee shops opened in 2006 and 2007.

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