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U.S. same-store sales decelerated from 2Q and were down mid single digits in 3Q. Traffic trends remained weak. The company experienced traffic declines in the U.K. and slower sales momentum in Canada. Importantly, the reduction in new store openings and closure of underperforming stores will mitigate these trends in fiscal 2009.

CEO Howard Schultz said they are seeing signs now in the U.K. that emerged in the U.S. in the beginning of the year as it relates to consumer spending. He also said that the “very, very tough economy” in Spain has caused management to alter its growth plans because they don’t want to expand when consumers are under a lot of pressure. Management commented that they are facing significant challenges during the afternoon day part. They see the current economy as a tremendous headwind that has prevented them from moving the needle on improving traffic and the environment has proven more difficult than they anticipated back in January.

  • So how is this good? Starbucks had grown accustomed to 20%-plus revenue growth and 5%-plus same-store sales growth results. Three consecutive quarters of negative comparable sales and traffic, 9% sales growth and about 500 bps of U.S. margin compression in 3Q has forced management to make real changes.
  • U.S. company-operated store unit growth had been in the 13%-19% range YOY, and now management is forecasting a negative 60 net new stores in FY09 as the announced store closures will exceed store openings. Capital Expenditures as a percent of sales have been moving up rather significantly, from 7.8% in 2004 to 11.5% in 2007, despite declining returns. Based on the company’s revised guidance, however, capital expenditures are expected to be $1 billion in FY08 and $750 million in FY09, a 7% and 30% decline, respectively from 2007. This more disciplined spending will generate incremental free cash flow and yield better returns for shareholders. To that point, it was encouraging to learn that the company is seeing incremental sales at the stores that are in proximity of the 50 stores that have already been closed.

    The company also lowered its international unit growth targets to 825 net new stores in FY08 (from prior guidance of 975) and 900 net new stores in FY09 (from 1,050). Management said they are taking “learnings from [their] U.S. market experience and approaching international growth with cautious optimism, given the current environment.”

  • Relative to overall traffic declines, management indicated that it is seeing an uptick in afternoon traffic as a result of its Vivanno and Sorbetto beverage launches, which they highlighted as an incremental positive as afternoon traffic “has been the burden for the past six months or so or even more than that.”

    Mr. Schultz reiterated that there is “no silver bullet” and that he cannot predict the economy, but that they are managing the things they can control. That being said, I remain convinced as Mr. Schultz said, “Starbucks is going to win.”