Exclusive: Starbucks keeps growth on the boil

By Lisa Baertlein

SEATTLE (BestGrowthStock) – Starbucks Corp (SBUX.O: ) will record only its second quarter of increased foot traffic in over three years, its CEO told Reuters on Thursday, brushing aside fears that slowing European and Chinese growth may hurt sales.

The world’s top coffee chain, which has been struggling to revitalize growth by slashing costs and introducing items like Via instant coffee, saw a rise in customer visits in the just-ended third quarter. That marked the second quarter in a row of gains at the chain, coming off more than three years of quarterly traffic declines.

Chief Executive Howard Schultz said in an exclusive interview he sees no sales impact from recent economic jitters in the United States and Europe. He is now looking toward emerging markets like China — where Via will debut this year — and Russia, a major market for instant coffee.

“The momentum that we have right now is quite encouraging considering the backdrop of the environment,” Schultz said from his office overlooking Seattle’s port. “The winds have changed and I feel like we’ve got the winds at our backs again, but we still have a lot to do.”

But “we all have to be very mindful of how fragile the environment is and be very careful.”

Schultz would not say whether third-quarter same-store sales, a key gauge of retail and restaurant health, matched the 7 percent gain seen in the second quarter, which ended on March 28. Starbucks, whose fiscal year ends September, will release June quarter earnings on July 21.

But he said sales trends in the United States and Europe have not worsened in recent weeks, despite market jitters fueled in part by Europe’s debt crisis.

Business in Western Europe “on balance is roughly the same,” Schultz said, who added that there was also no change to sales in the United States.

That underlined Wall Street’s expectations for sustained growth. William Blair & Co analyst Sharon Zackfia expects the latest quarter’s sales at established cafes — a crucial indicator of retail health — to be “at least as good” as they were in the prior quarter.

J.P. Morgan analyst John Ivankoe was less bullish in a recently issued note, in which he calls for a 6-percent rise.

HALF OF THE PIE

Starbucks recently finished a two-year business revamp that included slashing costs and closing more than 900 stores around the world.

Its U.S. business, which accounts for more than half the company’s profits, has returned to growth and Schultz is now focused on introducing new products to drive sales growth.

Key among them is its Via instant coffee, which is sold in the United States, Canada, Britain and Japan. Schultz said the company plans to build Via into a billion-dollar brand, with expansions into China within the next year and later on, Russia.

Starbucks now has just over 700 units in greater China, which includes mainland China, Taiwan and Hong Kong, but the company sees the world’s most populous nation and third-largest economy as its next major market.

The coffee chain has just 31 cafes in Russia, but they post blockbuster sales and the brand has cache in that market, Schultz said.

The top three instant coffee markets in 2009 were Japan, Russia and the United Kingdom with 2009 sales of $2.3 billion,$2.1 billion and $1.2 billion, respectively, according to Euromonitor.

Via, which debuted in September 2009, is on track for $100 million in sales in its first year. Starbucks expects Via to have a “slightly positive contribution” to fiscal 2010 earnings, even as it puts significant marketing and advertising dollars behind it.

“We’ve got a winner and we want to feed it,” Schultz said.

Frappuccino, widely seen as Starbucks’ most successful consumer launch with more than $2 billion in revenue, took three years — adjusted for inflation — to achieve similar sales, the company said.

Shares in Starbucks closed up 0.5 percent to at $26.13 on the Nasdaq, a year-to-date gain of 13 percent.

(Additional reporting by Martinne Geller in New York; editing by Edwin Chan, Andre Grenon and Valerie Lee)

Exclusive: Starbucks keeps growth on the boil