Starbucks' Chief Executive Stepping Down to Take on New Role

Updated from 5:27 p.m. EDT

Starbucks (SBUX Quote), which has been trying to expand overseas, said Thursday that Howard Schultz was stepping down as chief executive in order to take on the new role of chief global strategist.

Schultz, who will remain chairman, will be replaced by Orin Smith, currently president and chief operating officer. He had been chief executive of Starbucks since 1987.

The management changes will take effect on June 1.

The Seattle-based coffee company also reported that net revenues for the five-week fiscal 2000 period ended April 2 rose 33%, to $204 million, compared with $154 million for the year-earlier period. Same-store sales, those at outlets opened a year or more, increased 10% for the five-week period.

For the 26-week period ended April 2, net revenues rose 32%, to $1.03 billion. Same-store sales were up 8% for the period.

"As in January and February, sales results for March have once again exceeded our expectations,'' Schultz said in a statement. He reiterated company expectations for middle single-digit same-store sales growth and 25% overall revenue growth for the remainder of fiscal year 2000.

Schultz added that he now intends to concentrate on building the company's operations abroad. The company, which has some 350 stores throughout the Pacific Rim, the Middle East and Britain, aims to have 500 stores in the Pacific Rim and 500 stores in Europe by the end of fiscal year 2003.

"As I have previously said, we believe that we are still in the very early days of Starbucks growth cycle and that we can surpass 20,000 Starbucks stores worldwide," he said. As of late February, the company had 2,800 outlets.

Laurie Breidenbach, an analyst with Ragen Mackenzie, said that she was impressed with the numbers and believed that the managerial changes would support the company's commitment to expand its business.

"I'm not surprised Howard is going to focus on the international," said Breidenbach, who added that the company had an impressive strategy that had allowed it to exceed expectations.

"They have very solid numbers. I was looking more for an 8% increase for the month of March and they came in at 10%," she said.

Doug Christopher, an analyst at Crowell Weedon, echoed Breidenbach's sentiments, calling Schultz a "visionary." Christopher, who rates the company a buy, said he believed the reorganization would lead to strong international growth and help buoy the company's earnings outlook.

"This is one of the key sustainable brands to emerge in the 1990s," said Christopher, noting that the 71 cents a share consensus earnings estimate for the year was "good, but conservative."

Crowell Weedon does not do underwriting.

The company's announcement was made after regular stock market trading had ended. Starbucks' stock closed down 2, or 5%, at 37 9/16, on Thursday capping a 15% drop for the week. The decline began after Lehman Brothers and Merrill Lynch each cut their ratings for Starbucks.

Lehman lowered its rating to an outperform from a buy, while Merrill Lynch reduced its recommendation to a near-term accumulate from a buy. Lehman said that while it was still "bullish" on Starbucks, its stock market valuation was "a bit ahead of the fundamentals" that the company's performance could justify.

Breidenbach said she also downgraded the company recently, noting that the share's price surge over the past six months required an adjustment in the rating.

"The downgrade has to do with the appreciation in the stock," said Breidenbach, who lowered her recommendation to a market performer, the equivalent of a hold, from a buy. "We're not telling people to sell the stock."

Ragen Mackenzie does not do any underwriting for Starbucks.

Christopher defended his buy recommendation saying that in three to five years he expected Starbucks' shares to exceed current levels as well as the 52-week high of nearly 45 reached in March.