Starbucks' business may have bottomed in Q4: CEO

By Kathy Finn

NEW ORLEANS (Reuters) - Coffee chain Starbucks Corp (NasdaqGS:SBUX - News) may have weathered the worst of a sales slowdown as growth improved somewhat this month, its top executive said on Wednesday, and its share rose 8 percent.

"The downturn continued in the fourth quarter, and we did see a slight improvement in the first weeks of Q1 ... which might suggest that Starbucks may have hit bottom in terms of negative transactions in our fourth quarter," Starbucks Chief Executive Howard Schultz told reporters at a company leadership conference in New Orleans.

Starbucks is due to report earnings for its fourth quarter, that ended September, on November 10.

The company issued a press release Wednesday evening adding that the company had expected fourth quarter comparable store sales to be "relatively stable with third-quarter trends."

It added that Starbucks experienced further deterioration in the fourth quarter but in October, comparable store sales had improved slightly on higher average value per transaction.

Schultz said fourth-quarter customer visits and closely watched sales at established stores remained below last year's levels. But he was careful to say that improvements in the first week of the current quarter do not yet make a trend.

Schultz returned as CEO in January to lead a turnaround at the company that is grappling with increasing competition from the likes of McDonald's Corp (NYSE:MCD - News) at the same time as it recovers from a U.S. store building binge.

Starbucks earlier this year said it would close 600 poorly performing stores in the United States as well as 61 in Australia.

The Seattle-based chain famous for its pricey lattes also cut thousands of jobs and trimmed growth plans in a sharp economic downturn that has overturned its reputation as a recession-resistant consumer brand.

Starbucks in July posted its first quarterly net loss since going public in 1992. Schultz said on Wednesday that he does not see the economy improving for quite some time.

"The global impact of the financial crisis is significant, and we have to be careful around the world," he said.

CONSTRAINED CONSUMER

The CEO added that consumer confidence has been deeply fractured in the last three to four months.

"It's harder and harder to meet the expectations that people have had of our company because the consumer is so constrained," he said.

While Starbucks is not cutting prices in stores, it has stepped up value-oriented promotions.

For example, Schultz said that club store Costco Wholesale Corp (NasdaqGS:COST - News) is selling five $20 gift cards for $79.95.

"That's a catalyst for building traffic without discounting the products that we sell," Schultz said.

But compared with other companies, Starbucks appears to have been early to respond to the new economic realities, he said.

"When we announced the 600 store closings and the layoffs ... it appears that we were very early in identifying the issues and got out in front of it in many ways," said Schultz, adding that he does not expect to close additional stores.

He said he intends to remain at the helm of the company that he helped turn into a household name.

Shares in Starbucks rose 47 cents to $11.33 on the Nasdaq, but are far off their October 2007 year-high of $26.75.

(Writing by Lisa Baertlein in Los Angeles; additional reporting by Phil Wahba in New York; editing by Carol Bishopric)