The stock market was unsettled by Starbucks quarterly results. Revenue rose a very modest 9% to $2.6 billion, which is not impressive given the economic recovery of middle and upper class discretionary spending. Comparable store sales also rose 9%. Net income rose 41% to $209 million, which shows that the company has developed a the consistent cost discipline that eluded it for years.

Starbucks forecast fiscal 2011 earnings of between $1.36 a share and $1.41 a share, which was below the consensus forecast of $1.41 a share profit.

Starbucks stores have begun to fill up again and its store closings of two years ago may haunt it.Starbucks may find that is does not have enough locations to accommodate a growth rate greater than it had last quarter. Instant coffee, loyalty programs, and free internet service bring in customers, but whether they are mostly new customers is a matter of speculation. When Starbucks retrenched in the middle of 2008, it probably lost its chance to pick up large numbers of new consumers that might have come back to buy coffee that costs $4 a cup.

Starbucks fired 12,000 people in July 2008 to help offset the financial damage that the recession had caused. The coffee company also closed 600 stores. Starbucks plans to open 500 new stores in the US and overseas in fiscal 2011, but it will have lost the chance to exploit the improvement in the economy that is happening now. Ironically, what saved Starbucks money two yeas ago, may cost it sales this year and next.

The evidence that Starbucks stores are overfull, seating is scarce, and lines are long is anecdotal. The crush of customers will cause some potential consumers to walk in and walk back out immediately because waiting is never pleasant.

Starbucks’s period as a growth company ended when it made its retreat. The company increased its cash dividend by 30% to $.13 per quarter. Dividend increase are hallmarks of mature corporations.

Somewhere among those 600 shuttered stores there was a seed of growth for 2010 and 2011, and Starbucks probably killed that off too early. Cheap gets expensive.

Douglas A. McIntyre

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